Opinion: NZ's TWI back up towards its long term average
3rd Jun 09, 8:57am
By Danica Hampton Once more we awaken to a stronger NZD, with the USD having lost further ground across all currency markets. Despite media sound bites from both current and former Chinese officials, as well as US Treasury Secretary Geithner about the USD being regarded as the world's reserve currency, the market has lent on the USD. Instead, traders and leveraged accounts listened to Russian media that suggested emerging market leaders may discuss the idea of a supranational currency when officials from the BRIC nations meet later this month. This is not anything new from President Medvedev, he first spoke of this in March, but at the moment it simply poured fuel on the market's fire, helping to extend the greenback's losses. The rising NZD is of course a big issue for most of our clients; can New Zealand really afford this robust exchange rate, so very early in the supposed recovery cycle? We don't think so, despite what the international community may think. The NZD has run with the broader market momentum because of the backdrop of a sound economy, banking system and official policy moves. Throw in the surprising upgrade from S&P last week and there is some argument for NZ to be viewed as a bastion, of sorts. Obviously the international news shows the global economy fell into a black hole in the past six months, but that the hole is getting no bigger, this is good news. So in a very short space of time the NZ TWI is back towards it's long term average, having climbed 4% last week and 9% in the past month. This is in contrast to previous economic recoveries in past decades where the NZ TWI was at a deeply discounted valuation and was important in nursing the NZ economy back to health, i.e. the mid 1980's & the 1998 Asian crisis. Of course, many are already nervous about the NZD surge, and it seems certain to impact in upcoming business surveys. It has already sideswiped the payout intended in the dairy industry and will impact net incomes as well as debt servicing for new entrants to the industry. The currency's damage should be apparent in Thursday's ANZ commodity price indices. Mixed international export prices and the sharply higher currency will force the May update of the NZD based index down and it was already in April nearly 8% lower YOY. We should also consider the Treasury and RBNZ, who both have TWI levels substantially lower, (23% and 28% respectively), in their modelling for Q1 2010. While there's still a good amount of water to flow under the bridge till then, it still means next week's MPS will have some material change in its exchange rate projections. If the RBNZ project a substantially stronger TWI then this should have implications for their forecasts on the economy and inflation and call into question the assumed current account improvement. With all of this, as well as improving global growth forecasts, there is a heck of a lot in the bank's in-tray to consider before next weeks MPS. If the Bank is to be consistent with its previous prescriptions, it should remain disconcerted by the state of the international economy and financial system and appreciate that a pause might well stoke spikes in wholesale interest rates regardless of any "lower for longer" OCR rhetoric they repeat. This might be the principal reason for the Bank easing again, even if our analysts' 55% odds for a 25bp cut for next week seems to be on the wrong side of the fence for now. If the Bank holds rates then they may only support the NZD's recent surge and put the TWI at further odds with the strong GDP recovery that the March MPS foretold. The rising TWI has doubly depressing implications for prices and the current account deficit. More broad-based weakness in the USD is possible, primarily driven by concerns over funding the huge US budget deficit and, as seen overnight, a growing list of countries looking for an alternative to the greenback as the world's reserve currency. The optimism for growth profiles and the accompanying rise in commodity price fundamentals is helping the NZD overshoot justified levels. We have a potential target of the 0.6650/0.6750 window where we would be reluctant to be long NZD/USD in the absence of the domestic economy emerging from recession and the global economy doing likewise. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.