Kiwi dollar bounces up from the 0.6800’s again

Roger J Kerr sees a day of reckoning and crunch-time ahead for the Kiwi dollar

4th Oct 21, 7:55am by Roger J Kerr

Summary of key points: -

NZD/USD “converging wedge” chart formation – day of reckoning ahead
Stagflation revisited
Tough times for exporters to Australia

NZD/USD “converging wedge” chart formation – day of reckoning ahead

The NZD/USD exchange rate zoomed up to a high of 0.7170 just over a month ago on 30 August 2021, reportedly on the back of large-scale and concentrated NZD buying to settle a cross-border acquisition of a pet-food company.

It failed to break above that important chart resistance level (refer NZD downtrend line on the chart below) at 0.7170 and has since traded more than three cents lower to 0.6860 on 30 September 2021.

The sharp turnaround in direction due a stronger US dollar on global FX markets (as was expected at this time with the EUR/USD moving below $1.1600).

Also contributing to the weaker Kiwi dollar trend over the last month has been a growing realisation by the local financial markets that although the RBNZ will increase the OCR by 0.25% this Wednesday, their conviction and commitment to further multiple interest rate increases (monetary tightening) over coming months will be somewhat less than their gung-ho/bullish 18 August statement.

The Covid delta outbreak is having a much longer and fatter tail than the RBNZ would have considered as a risk factor in mid-August. The RBNZ will correctly be dialing-back their overly optimistic August outlook on the economy as the prolonged Auckland lockdowns continue with accompanying adverse economic consequences.

Lower US equity markets and a stronger US dollar hit the risk-sensitive antipodean currencies last Thursday 30th September, driving the NZD/USD rate down to 0.6860.

However, a surprise rise in US jobless claims (higher unemployment benefit applications) later that day caused the USD to weaken back, and the NZD rebounded upwards.

The Kiwi recovery was aided by the Australian dollar also finding buyers at 0.7200 against the USD when iron ore prices jumped up 10% on pre-holiday buying in China. The Aussie appreciated to 0.7270, allowing the Kiwi dollar to climb a full cent to 0.6950. Local USD exporters who have been judiciously placing NZD buy orders between 0.6950 and 0.6800 to top-up hedging percentages have yet again been richly rewarded.

Looking ahead at the likely NZD/USD direction over coming months, there will need to be an event or change that is materially different to what is currently priced-into the exchange rate to cause a movement, either way: -

To push the Kiwi dollar up through its resistance level at 0.7120 on the topside.
Or alternatively, push down through the up-sloping support line at 0.6870 on the bottom-side.

The converging wedge formation on the NZD/USD chart over the last 12 month’s movements (the highs are lower, and the lows are higher) points to a day of reckoning and crunch-time ahead for the Kiwi dollar.

Over recent weeks, this column has been outlining the likelihood of one last bout of US dollar strength in September/October to $1.1500/1.1600 against the Euro which would fully price-in all the USD positives of QE tapering and interest rate increases in 2022 and 2023.

The EUR/USD rate traded at $1.1565 last Friday, so have we already witnessed that last bout of USD strength and from here their dual deficit problem suggests a weaker USD trend? Time will tell, but that probability has increased.

A weaker USD from current levels on the global stage points to the Kiwi dollar heading upwards and out the top-side of the converging wedge formation. The timing of that potential move could still be many weeks away, but that probability now appears somewhat higher than a break lower below 0.6800.

Stagflation revisited

One outstanding feature of the New Zealand economic and currency forecasting landscape is that bank and RBNZ economists very rarely look back at their previous forecasts and their reports on the economic outlook and critically assess how accurate they were (or were not!). They all just publish new forecasts and hope that the readers have forgotten about their previous forecasts!

In my 11 April 2021 FX Market Commentary, this column proffered a minority view at the time that “stagflation” (low growth, high inflation) may be ahead for the NZ economy.

“Therefore, we are headed for a period of flat/negative GDP growth with higher inflation (i.e. stagflation), which is a big change from the very positive environment (prior to March 2020) of relatively high GDP growth and very low inflation. On average, households will be worse off. In particular, the non-property owning, lower socio-economic sectors who are facing rent increases thanks to tax policy changes from a Labour Government (that is supposedly representing them).”

Local mainstream media reports are now discussing the potential for stagflation, a major reversal from the housing boom/retail spending boom they were all hyped-up about a few short months ago.

Unfortunately, Finance Minister Grant Robertson still sees the NZ economic outlook through rose-tinted glasses and seemingly does not understand that the all the public and private sector spending over the last 18 months has been debt funded i.e. “fool’s paradise”.

Respected Wellington economist, Bryce Wilkinson recently published an excellent article on New Zealand’s economic history with over-extended debt. It never ends well, and Grant’s naivety would be reduced if he read this economic history lesson.

GDP growth in the June quarter was stronger than expected (hence the RBNZ August knee-jerk on monetary policy), however the delta lockdown since then, the compounding supply chain chaos and labour shortages now point to a “lower growth and higher inflation for longer” outlook for the NZ economy. Globally, GDP growth forecasts (particularly in China) are now being revised down and the higher inflation is not proving to be too temporary.

Tough times for exporters to Australia

Another important business and economic risk looming as a problem is selling product into our largest export market – Australia.

On top of the NZD/AUD cross-rate spiralling from 0.9200 to 0.9700 over a three month period hitting profit margins (for those not adequately hedged), exporters into Australia are now facing strikes at Sydney ports causing delays and uncertainty. Unhappy Aussie customers may look to source from elsewhere.

The good news for our exporters is that the Aussies are returning to some formal of normal life in November as they have reached their vaccination targets.

Here in the hermit kingdom, the Government does not have a plan or targets and PM Jacinda’s politicisation of the pandemic is about to backfire on her government as the public mood of anger and frustration increases at continuing lockdowns. The health experts will be advising to leave Auckland in level three, however that will not be popular from a political perspective for the Labour Government. Therefore, expect the PR spin on a modified level two (in effect still level three).

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Source: RBNZ

Source: CoinDesk

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.

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3 Comments

by Fairlyfrank | 4th Oct 21, 10:22am 1633296124

Agreed that there is anger building at the lockdowns people are getting fed up especially as they see groups flouting the objectives with impunity. However when delta wins which I believe it will shortly, the health system will be in chaos as we are probably the least prepared of any country in the OECD for this outcome . The international view of nz will change affecting our economic prospects materially this will lower our dollar and the standing of adern in one fell swoop .

by J.C. | 4th Oct 21, 12:15pm 1633302950

DGM. Mind you, Roger Kerr's Kiwi exceptionalism narrative seems now heading into DGM territory on debt.

by RCD | 4th Oct 21, 10:40am 1633297200

Charts as shown above can be interpreted in several ways, a converging wedge is i think a long straw.

https://www.dropbox.com/s/lics8l9ez8w8ab3/Untitled-1.jpg?dl=0

I see it as a descending channel on this timescale