By Roger J Kerr
New Zealand has been heavily favoured over recent times as an attractive currency destination for international funds seeking a safe-haven away from the USD and Euro.
The Kiwi has been favoured over and above the Aussie dollar as the outlook on our interest rates is up, whereas theirs is down.
Our economic data has been stronger than Australia’s of late as well.
Can this favoured status for our currency last and propel the NZD/USD rate to 0.9000 and higher as several bank economists are now picking?
Two upcoming statements from our monetary industry leader and dairy industry leader are likely to influence the NZD currency market sentiment in the short-term:
1. This Thursday’s OCR Review by the RBNZ provides the opportunity for Governor Bollard to 'jawbone' the NZ dollar down as he will realise the potential damage a 0.8500 to 0.9000 NZD value will have on the export sector that is providing all the growth to the economy.
The RBNZ statement cannot allow any interpretation by the markets that it is even marginally hawkish, as that would send the NZD higher still.
The domestic economic data demands an ending of the monetary stimulus, however the RBNZ will know that they cannot even hint at a signal that they might be hiking the OCR earlier than what they have already indicated.
Who would have his job?
2. There is no indication yet that Fonterra is even contemplating a statement on their 2011/2012 milksolids payout forecast to dairy farmers; however what Chairman, Sir Henry van den Hayden says in this respect may have more impact on the NZD value than what Governor Bollard verbalises.
It is not publically disclosed (yet) as to what level Fonterra have sold wholemilk powder (WMP) forward at the previous high prices and to what percentage of the next 12 month’s export sales they have hedged the currency risk, however recent material market price movements in both variables suggest that the current $7.15 to $7.25/ kilo milksolids payout forecast could be under threat of a downward revision.
That 2011/2012 forecast did build-in lower WMP prices and a higher NZD/USD exchange rate, however the latest lower WMP/higher currency movements are arguably well in excess of Fonterra’s expectations.
A lot of the speculative Asian money that has come into the NZD over recent months has done so on the back of the diary price boom. Confirmation from Fonterra that the milksolids payout forecast has to be lowered would certainly be a negative for the Kiwi dollar. The Europeans and Americans have released additional volumes onto the globally-traded WMP market; this is why the WMP price is now falling rather rapidly.
The Kiwi dollar is now in massive 'over-shoot' territory, however there has to be specific New Zealand negatives to reverse the upward momentum.
A general recovery by the USD in global FX markets after the US Government sort their debt ceiling deal may bring the NZD/USD rate back down, however all the other cross-rates would remain stable at the their elevated levels. The ANZ Commodity Price Index due for release next Monday, August 1 will be another reminder to international investors in the NZD that our commodity prices have reversed dramatically.
The speed at which the NZD/USD rate has gone up from 0.8100 to 0.8650 over recent weeks suggests a vulnerability to an over-brought market and thus potential for a pull-back just as sharp.
What the catalyst will be for specific NZD selling is hard to predict, however my guess is that it will be more to do with milk powder than monetary policy.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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12 Comments
Bollocks. Kerr's whole argument hinges on the 'damage' done to non commodity exporters...that the rest of the economy should cop a facefull of higher fuel and cost of living to save their bottom line...that's plain silly talk. It's even worse when you consider the same exporters also benefit from the lower cost of fuel etc.
How about Kerr putting up some specific case examples that show unquestionable damage to named companies...!
As for Bollard pretending the ocr MUST stay low...no sod will believe him anyway. And the only outcome of doing so is to bash savers and ensure the rates rises will be a dam sight steeper to catch up with the beast already charging out the bloody gate.
Yes, beast well out of gate and off looking for a good time.
Silly old Bolly. Nice chap, takes his job seriously, but not quite got his ducks in a row. His lazy target of 1-3% is blown and he still hasn't thrown the switch. So his real target is 5-7% inflation it would seem.
Not that the OCR has much to do with the level of the NZD, it is sometimes the dominant factor but not very often I think. Seems to me capital flows is usually the big one, so if we are borrowing big time (Hello there John, wakey wakey) then money is flowing into NZD - more buyers of NZD means price goes up. Unless you increase the supply of course.
I would have thought that the good doctor and the Queen's first minister could easily sort it all out if they wanted to.
So we are back to financial repression (deposit interest less than inflation) in true 1970s fashion. Sigh.
Its simple supply and demand, as the US have increased debt to keep their bankrupt economy floating some of the money has spilled into NZ and Aus and to no surprise our dollar is at a high in comparison.
So I agree with you Roger W. that the OCR has little to do with the current situation.
Compare our currency to Gold or Oil and I guess (I don't have a car), you will see that our currency has been stable while America and European $ have lost ground.
One things for shore we live in exciting times.
Hey Wolly, I run a software business here in NZ that licenses to our clients here, Aussie, Canada and the USA. It's just two of us, we've been at it for six years now and probably 80% of our clients are in the USA and pay us an annual license in USD.
In the last 3 years we've doubled our client base but our turnover each year hasn't changed. We'd hoped to have hired 2-3 more people by this stage but all we can manage is treading water. I've poored blood sweat and tears into what I hoped to be a productive business and the thought of that being taken away due to the exchange rate is devistating.
Sorry for the sob story but I just wanted to let you know that us exporters getting hammered by the exchange rate do exist.
It seems that diversifying is our only hope. We need more clients that will pay us in currencies that have not devalued against ours so drastically.
Focusing our sales efforts on Canada seems our best short term bet with our current set of products, but we've also got ideas to tweak our software and re-package it so that we can try to get more sales within NZ. These changes also involve importing hardware to compliment our software, allowing us to take advantage of the currency. It's a long shot, but a shot none the less.
Other than that it's just more sales.
Wouldn't it be funny if on Thursday Alan B announced and end to his near zirp madness and shoved the ocr to 4% in one hefty move....and made it crystal clear he would not stop until the banking blood ran in the street....tough love has arrived...save and stop borrowing...the proper way to generate wealth....wham... bam... crash... clang....by 2pm JK would be announcing the appointment of one Alan Bollard as the NZ Ambassador to Beijing...flight leaving at 6pm!
By gum the Stone Cutters can move with speed when the blow is heading their way.
4% would be a good start Wolly but with all these Canterbury homeowners looking to borrow for a new house he wont do it.
A home buyer works out what they can afford to repay including interest rates, so if rates are high then house prices either come down to compensate or the purchaser moves on. If rates are low the current home owner has room to put their price up.
Remember, the lower that interest rates are the more people can borrow and the bigger profits banks make.
If you look at how bankers operated in America, first they created a property boom through cheap loans, then once the market was at capacity they shut down the boom with a manufactured collapse of their making which the tax payers bailed out.
Now the banks own America (if they didn't before).
Is there any reason to suggest that banks operate differently here?
NZ has a massive debt overhang that needs reducing so the country can move forward. In the USA people have just defaulted on their mortgages and walked away, here in NZ that has not happened. We need a bit of inflation to bring down the real value of our debt. I would say that Bollard is less worried about inflation than people think.
With all the global uncertainty around Greece, Ireland and the PIIGS of Europe and the USA debt issue, not to mention bankrupt Britain, and the Chinese real estate bubble - and the high NZD hurting exporters, I can't see rates massively rising anytime soon.
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