The Kiwi dollar has shown some early signs of recovery over this last week from the “sell-off” funk it found itself in when the external coronavirus/economic shock hit global financial and investment markets six weeks ago.
The NZD/USD exchange rate has traded higher to 0.6350, recording a 1.6 cent bounce upwards from the lows of 0.6190 just a week ago. What provides further reassurance to the view that the Kiwi selling was overdone on the initial reaction to the coronavirus risk event, has been a dramatic reversal in the fortunes of the US dollar itself over the last seven days.
The USD has weakened further against the Euro to $1.1290 from $1.1130 a week ago, following the “emergency” 0.50% interest rate cut by the Federal Reserve in response to the potential negative consequences on the US economy from the coronavirus shock.
The EUR/USD rate is now threatening to break out of the top of the $1.0800 to $1.1400 trading band it has remained within over this last 12 months. The sudden change in sentiment towards the US dollar in global currency markets comes from the unexpected reduction in both US short-term and long-term interest rates now occurring. Investors were very happy to hold US dollars as a safe-haven and higher yielding currency through all the uncertainties of the trade wars last year, however the yield gap to other currencies has now narrowed considerably and the resolution of the trade wars is now off the front pages as the coronavirus dominates.
The long term expansion of the US economy and the related bull-run in the US share market over the last five years, both nearing the end of their respective cycles in any case, are now threatened by both US political and economic risks not even contemplated a few short weeks ago. In a perverse turn of events the US dollar as a currency now looks a lot less attractive in the face of negative investment returns and the US government fiscal stimulus required by the coronavirus impact constrained by a large budget deficit and high debt levels.
The overall value of the US dollar, the US Index against all the major currencies, has plummeted -2.4% from 98.50 on 20 February to 96.10 on Friday 6th March. In very short fashion the positive US economic story that President Trump has trumpeted on about incessantly over the last three years has turned to custard by a global health pandemic.
The total lack of positive response by equity, bond and currency markets to the very positive 275,000 increase in US jobs though the month of February released last Friday is very instructive and telling about the change in sentiment in the US financial and investment markets. Normally, such a positive economic number would have sent shares, interest rates and the US dollar values all higher.
The additional risk the markets are also now reflecting is an increased probability that Donald Trump will not be re-elected as President in November as the economy and Wall Street supports to his popularity are eroded away. Many investors will be running scared of the risk of what a Democratic President in the form of Bernie Sanders or Joe Biden will do to their portfolio values and returns. The markets are looking forward and representing a sharply increased risk of economic recession caused by the coronavirus stopping work, shopping, travel and holidays.
Over coming weeks, the new weaker direction and momentum of the US dollar is not expected to change from what we have witnessed over this last week. Therefore, a move up to $1.1400 and $1.1500 in the EUR/USD exchange rate should result in another two-cent gain for the NZD to above 0.6500.
Based on relative economic fundamentals and performance the Kiwi dollar is now considerably under-valued against the Euro at a 0.5630 cross-rate and the UK Pound at a 0.4870 cross-rate. As the coronavirus shock inevitably passes and reduces in intensity, a re-rating of the Kiwi dollar vis-à-vis the EUR and GBP appears very likely.
RBNZ OCR cut already priced-in
It is already priced-in to both local interest rate markets and the NZD/USD exchange rate that the RBNZ will follow the RBA and Fed with an interest rate cut on 23 March when their Monetary Policy Statement is released. The Aussie dollar strengthened on the RBA cut of 0.25% last week as it was a smaller reduction than the surprise 0.50% cut delivered by the Fed. Do not expect further NZD weakness on the local OCR cut.
The RBNZ’s messaging will be somewhat changed from their upbeat 12 February prognosis, as the coronavirus impact on the economy will be more long-lasting than the earlier assessment. It is a very long time from now until 18 June when the GDP growth numbers for the March quarter are released to gauge the full impact of the coronavirus shock onto the NZ economy. Whilst a low or negative quarterly result would be bad news for the Kiwi dollar, a lot can happen in the meantime with the more positive December 2019 quarter’s GDP figures being released on 19 March and developments globally with the coronavirus situation.
As yet, we do not know the timing of the peak or the timing of a vaccine treatment for the coronavirus that has slowed trade, travel and business globally. However, what we do know from past experience with SARS etc is the potential for a massive bounce-back and catch-up in economic activity once the risk event runs its course.
China has more fiscal stimulus ammunition to fire than the US
The strong linkages between the New Zealand and Australian economies with China caused the substantial sell down in both currencies through February. However, currency markets are now starting to realise that the Chinese Government is much better placed from a position of fiscal strength to rescue and re-stimulate their economy from the coronavirus shock than what the Americans are. New Zealand is also in a strong fiscal position to help affected industries as well.
Both the Kiwi dollar and the Aussie dollar have some catching up to do on the Chinese Yuan which has strengthened against the USD to 6.9300, reflecting that Beijing has more economic options at its disposal from here than what Washington has.
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*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.
28 Comments
Interesting commentary - talks down the USD but nothing around the effects of:
1. Italy locking down their econmic heartland in Lombardy - including Milan. Italy if I recall is around the 2nd or 3rd largest economy in the Euro Zone. News is not exactly Euro positive.
2. Oil down 10% on Friday and now Saudi's announcing effectively price war with rest of OPEC/US/Russia for market share. Effectively going to up production when demand is going down. Oil is potentially going back into the 20 and 30 mark. Deflationary shock coming...
3. C19 virus - as yet NZ has not experienced community outbreaks - but signs are starting to emerge in Oz and NZ is probably a number of weeks behind them. So unless we are incredibly lucky, it's only a matter of time - Check Italy as an example of how it can ramp up very fast when out in the general community.
As it stands we are heading towards a very nasty global recession and nothing any of the central banks can do about it - interest rate cuts are like pushing on a piece of string basically. Hopefully we will see/need the Kiwi to weaken - as in times of crisis etc, floating currency is the shock absorber to our economy and last thing we need is for our currency to strengthen vs AUD/USD etc.
Who else finds Roger's unshakeable bullish NZD predictions farcical at this point?
I mean honestly. No one can make a prediction on the effect of Covid-19 in NZ at this stage. It's not even winter yet, we have no idea how equipped our health services are or what political steps may or may not be taken, we have no idea whether we will suffer a serious outbreak, maybe we won't. For all we know, there are already 100's of people incubating from the Tool concert, who have already spread to others.
We don't even have an official pandemic yet and the people are hoarding globally, so the fear is an issue even if the virus doesn't take hold. NZD is a risk-on currency, a great big, whopping Black Swan lands on the global economic pond but Roger still has his NZD rosey tinted spectacles on.
There have been so many comments over the years on Roger's relentless NZD optimism and it hasn't changed his stance remotely, so I can only assume, he either doesn't read the comments or doesn't care. There must be some reason for it though and I think anyone coming to this website for currency information, should be aware of Roger's bias.
I make currency exchanges every month. If I had followed Roger's advise over the last 3 years, I would have been much the poorer for it.
When the SHTF in the manner we all assume it will I know I would rather have my mad money in USD rather than some small one trick pony that is somewhere in the Pacific or Indian oceans (according to a lot of Americans).
You know when I read financial articles recommending this share or not that one the author quite often in footnotes specifies whether they hold a position in that share. Is it required by law - I dont know? If Roger has positions that are short the USD he really should indicate this I believe so we can determine how impartial he is.
Could it be a case that demand for USD funding has recently fallen off a cliff?
What all this data shows, as opposed to conjecture about the supernatural powers of central banks, is that yuan’s devaluation may be directly tied to dollar shortages. In fact, as I argue here, it is far more plausible that a dollar shortage (showing up as a rising dollar, or depreciating yuan) is forcing the PBOC to allow a wider band in order that Chinese banks can more “aggressively” obtain dollars they desperately need. Worse than that, the PBOC itself cannot meet that need with its own “reserve” actions without further upsetting the entire fragile system. Link
Reading all the embedded links and the links from those links, especially the BIS papers, is necessary to gauge the immense size of lending and borrowing that is executed in basically unreported FX swaps between international bank counterparties.
Nothing of this type as happened earlier when sars or swine flu happened so trying to give that analogy is bad as this time it can bounce back like it has happened earlier or not in near future. So till a solution/vaccine of Corona Virus is developed, no one can say for deinite what will happen and all so called experts are guessing as have to run their kitchen so all reader should take their view and use it for entertainment purpose only.
Sorry Jolly Roger but dollar will only strengthen from here
How are you so sure? People here seem to think that the USD is the only refuge. While there was some truth in that in previous times, that may not be the case now, particularly with the interest rate differential being decimated. One only has to look at USDJPY in the past week and month to understand what really moves in crisis.
From what I've seen, USD, CHF, JPY are currencies which tend to appreciate when funds take risk off.
Well take a look at USDJPY then. Why do you think the yen has appreciated more against the USD? And how about gold?
The idea of USD as a safe haven used to make sense. That is not necessarily the case now. It's allure may not be as strong as you think, particularly in a world where all currencies are racing to the bottom.
I tend to agree. Why? Oil and gold are priced in US dollar. US has the most powerful military still (to ensure the previous sentence remains true) and in times of uncertainty, people want strength. As the world still consumes oil for it's underlying production, the US petro dollar is essentially the worlds defacto currency as it is essentially "energy dollars". Unless they print trillions and trillions to try and get out of debt, I don't see how the USD can fall significantly and I imagine it will only get stronger.
I aren't an expert though, so I could be completely wrong!
Oh for goodness sake , SARS was not even on our radar in 2002/3 , it was nearly 2 decades ago , China was still a relative backwater , and Chinese tourism was barely even a thing .
COVID 19 is way more serious
The awful truth is that over the 100,000 known cases , 3,000 have died in a short 90 days .
Its spread rate is multiplying at a rate akin to compounding
Thats 3 %............dead in a short timeframe
In 90 days
Thats 300% MORE than people who would usually die of influenza
AND its on top of (in addition to ) those dying of flu, who are still succumbing to flu .
I’m long USD for some very simple reasons. Europe is in serious trouble and negative rates have destroyed the bond markets there, as well as their banks. In the short/medium term there is only one currency where the big money can park and that’s in USD. If you think that everyone will flood into NZD/Yen/CHF/AUD, then good luck to you. I would be betting on NZD0.50 before NZD0.70 in 12-18 months from now. No doubt, there will be big losers and winners out of it as always. I think the biggest risk is being complacent and expecting low volatility and small currency movements over the next 2yrs or so. If you’re an importer or exporter and you can’t cope with 20-30% currency movements, then you cannot afford to be exposed.
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