Roger J Kerr says the strong US jobs figures in June will not in themselves be enough to deter the Federal Reserve from cutting American interest rates

After posting strong gains over the last two weeks from the low of 0.6500 to a high of 0.6725 on 1 July, the Kiwi dollar has been forced to retreat to 0.6625 by a stronger US dollar on global FX markets. The level of 0.6725 is a major technical/chart resistance point for the Kiwi and it has failed on its first attempt to break above.

The USD has been under downward pressure over recent weeks as the financial markets price-in anticipated US interest rate cuts by up to 1.00% over the next 12 months.

That direction and sentiment towards US interest rates and the USD is now under question following the much stronger than expected Non-Farm Payrolls employment figures for the month of June released Friday 5th July.

US jobs increased by 224,000 over the month, well above consensus forecasts of +160,000.

The employment expansion was primarily in the healthcare, education and services sectors, and even manufacturing made a recovery to 17,000 new jobs after virtually no increases over the previous three months.

The positive US employment outcome in June should be regarded as something of a bounce back from the extraordinarily low increase of only 65,000 new jobs in May.

The two months together average +144,000, which remains well below the average monthly increase of 200,000 over recent years.

The strong June number should not in itself be enough to deter the Federal Reserve from the first pre-emptive interest rate cut this month, or next.

The odds still favour a material slowdown in US economic growth over the June quarter, following the 3.2% annual growth rate in the March quarter.

Manufacturers holding back from business expansion decisions due to the trade wars uncertainty, higher manufacturing costs due to tariffs and a strong inventory build-up over the March quarter ahead of the import tariffs will all contribute to a weaker second quarter number.

Despite the China/US trade talks now being back on track, the Fed will still be expressing concern about a weaker global economy and risk factors on the US economy.

In summary, one months’ jobs numbers appear unlikely to change the growing market view that the US dollar will lose ground against all currencies as US interest rates are cut earlier, and by more, than other economies from this point.

The USD side to the NZD/USD exchange rate

The EUR/USD exchange rate has traded in a relatively narrow range between $1.1100 and $1.1400 over the last six months.

At the current spot rate of $1.1225 the USD in near the midpoint of that band.

There is little in the way of positive economic news coming out of Europe to suggest a stronger Euro is justified.

German manufacturers have been reeling from lower Chinese demand for their products.

A resolution to the US/China trade spat may return some confidence to these German manufacturing exporters.

However, on the basis of weaker US economic data over coming weeks and months, the changed market sentiment towards the US dollar should see the EUR/USD rate lift to $1.1400/$1.1500.

The USD has been a strong currency over recent years in the expectation and the delivery of higher US interest rates, that interest rate factor has now completely reversed, and the USD currently stands as over-valued (even Donald Trump believes this!).

Whilst the current New Zealand economic performance in 2019 may not be as stellar as prior years, the NZD/USD exchange rate can still be forced higher due to fundamental shift in the US dollar’s value on the global stage.

Local exporters in USDs should be focused on this risk and not solely believing that all the doom and gloom forecasts for the NZ economy will automatically send the Kiwi dollar lower. There are always two sides to an exchange rate price discovery and thus direction.

Australia turning the corner?

The Aussie dollar has not recoiled as far as the Kiwi dollar against the USD over recent days, pulling the NZD/AUD cross rate back from a high of 0.9585 on 2nd July to 0.9490 on July 5th.

The outlook for the Australian economy is starting to improve with tax cuts providing a lift to consumer and business confidence, mining commodity prices holding spectacular gains (coal and iron ore), interest rates cut to 1.00% and even the beleaguered residential property market in Victoria and NSW confirming the bottom has been reached.

Surveys of both business and consumer confidence in Australia over this next week should confirm that improvement in mood. 

Of all the major currencies that have weakened against the USD over the last 12 months, the AUD has depreciated the most (8% depreciation from 0.7400 to a low of 0.6800).

The AUD stands to regain the most as their economic outlook is now not as negative and thus the Aussie dollar will be seen as a viable alternative to those global investors wanting to diversify away from weakening USD denominated assets.

Currency speculators are still heavily short-sold on the AUD, the failure of the AUD/USD rate to trade well below 0.7000 will eventually force them to unwind their positions by buying AUD’s back.

Inflation figures next NZ data point

The next key data release for the Kiwi dollar is the June quarter CPI inflation figures on 16 July. A result above consensus forecasts of +0.50% will send the Kiwi higher as the RBNZ’s overly dovish inflation/economic outlook will be under question. Higher fuel prices over the quarter may well have flowed through into other price increases across the economy.

Importers and exporters with currency risks should not read too much into the low business confidence reading last week from the quarterly NZIER business confidence survey.

Whilst on the surface the survey result suggests lower economic growth ahead, in reality this survey has been a poor predictor of NZ’s actual GDP growth as it is not representative of the total economy. For unexplained reasons NZIER fail to survey the dominating agriculture and primary industry sectors.

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