Here's our monthly currencies outlook and review with HiFX's Senior Dealer Dan Bell including a look at the correlation between the New Zealand dollar and the gold price, and a prediction the Kiwi could fall to as low as US75 cents by the end of the year.
Bell has been looking at the relationship between gold and the New Zealand dollar, noting both are now down from similarly timed peaks.
"Gold was obviously very popular through the Global Financial Crisis (GFC) and it had a massive rally to almost US$2,000 an ounce," Bell says. "It actually peaked at just over US$1,900 in August 2011. At the same time the New Zealand dollar peaked against the US, it made a post float high of about US88.40c."
"Since then the gold price is actually down almost 20%. We're hovering around US$1,500 an ounce. The New Zealand dollar is sitting around US82.50c at the moment, so still relatively high." (These gold and NZ dollar rates are as of Thursday when this interview was conducted. As discussed in the video, the Kiwi has been pushed lower recently by uncertainty caused by Italy's election and renewed fears over Euro-zone sovereign debt issues).
Bell believes the gold price is now showing that investors are changing their view both of where the US dollar is heading, and where the global economy is going.
"Previously I think the gold price was reflecting the fact that investors saw a couple of fairly negative scenarios that could have evolved. And that was either hyper inflation, because global central banks had pumped the world full of too much money, or ultimately the world was going to fall off a cliff because we had the European sovereign debt crisis and the US with its own debt issues," says Bell.
"Those things haven't come to fruition. We don't have a major inflation problem around the world and the world hasn't fallen off a cliff. The US economy is starting to gather more momentum. And whilst the New Zealand economy is still having fits and bursts of activity, we're still expected to grow at about 2.5% this year as well. So overall that to me signals that the US dollar has got a stronger tone to it overall and I think from the second-half of this year and into 2014, I think that gold price will continue to come off and the US dollar will continue to strengthen."
Back to US75c?
Asked how far the New Zealand dollar could fall against the greenback, Bell suggests back towards its long-term averages.
"If you look at the long-term averages, the five-year average for the Kiwi-US is around about US75c, the 10-year average is around about US70c. We've been in a long-term uptrend for quite some time now. If you go back actually all the way to 2001, at which time we were down under US40c, we've been in a long-term uptrend since then," says Bell.
"And then you take 2008 and the start of the US quantitative easing programme (QE), the New Zealand dollar has been extremely strong. So in a way we've got used to it but ultimately it wouldn't surprise me to see the New Zealand dollar return to those long-term averages. And US75c, I think, would be a reasonable level to expect the Kiwi-US to get to by the end of this year."
In the US, where the Federal Reserve has had its overnight bank lending rate at between zero and a quarter percentage point since December 2008, and which is now into its fifth year of QE or money printing, Bell notes a strong trend in the housing market, the sector where the GFC began. Figures out this week from the US Commerce Department showed sales of new homes reached their highest level in January since July 2008 and house prices ended 2012 with their biggest annual gain in more than six years.
Sales of single family homes rose 15.6% to a seasonally adjusted annual rate of 437,000 In January. This beat expectations of 381,000 sales. And separate data out this week showed US consumer confidence up more than expected in February.
"That to me signals that the US economy is in a much better position than they have been. We know that the housing market in New Zealand obviously drives a lot of economic momentum and I think it's similar in the US where if the price of peoples properties is going up, they're going to be a lot more willing to spend and feel a lot more confident about the prospects of the economy," says Bell.
"So that (the housing market) to me is going to be a key driver."
NZ dollar vs US dollar chart
Could the Fed's QE be nearing an end?
The Fed's monetary policy is the key driver of the New Zealand dollar against its US counterpart and for now the Fed is prepared to continue its QE programme. However, against the backdrop of an improving US economy, Bell notes rumblings from Fed voting members about exiting the central bank's QE-led stimulus programme.
"And the market is also starting to anticipate that as well," says Bell. "So that I think is going to be a key driver of the Kiwi-US cross rate over the next six to 12 months."
That said, the US still has high unemployment at 7.9%, and the Fed is targeting a reduction to 6.5%. It has pledged to keep interest rates low until unemployment falls below 6.5% and inflation tops 2.5%.
"So watching the US employment figures over the next few months is going to be quite critical in terms of understanding when the Federal Reserve will start to signal that they are going to start to remove some of the stimulus out of the system," says Bell.
The next key US employment data, non-farm payrolls, is due on March 8 and is expected to show the world's biggest economy added 151,000 jobs in February, with the unemployment rate steady at 7.8% to 7.9%.
"But watch for any surprises there," Bell says. "Because if we do start to see any meaningful improvement in that unemployment rate, the market will quickly respond and start pricing in an earlier exit by the Fed from this QE infinity programme that they've been undertaking."
Then, on March 19 and 20, the Fed's monetary policy setting body, the Federal Open Market Committee meets. This will include the release of a summary of economic projections and a press conference from Chairman Ben Bernanke.
NZ dollar vs Aussie dollar chart
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Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.
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43 Comments
Looks like we may have already peaked Kiwi cross with USA $. Possible the 10 year run cycle in commodities is coming to an end. The $1 Kiwi could be $0.75 or less by the end of this year. We can also see the Canadian dollar is also topping out. As we head toward 2014 the Chinese economy will take turn for the worse also hitting commodity currencies.
The $1 Kiwi could be $0.75 or less by the end of this year.
Martin Feldstein begs to disagree:
The dollar’s real trade-weighted value already is more than 25% lower than it was a decade ago, notwithstanding the problems in Europe and in other countries. And, despite a more competitive exchange rate, the US continues to run a large current-account deficit. If progress is not made in reducing the projected fiscal imbalances and limiting the growth of bank reserves, reduced demand for dollar assets could cause the dollar to fall more rapidly and the interest rate on dollar securities to rise.
Our $ could go a lot higher, dragged along by the Aussie
http://wallstreetexaminer.com/2013/02/27/australia-shale-oil-discovery-…
Bahaha, really? Is anyone else predicting this? Let's have a vote. Who says Dan Bell is onto something suggesting the US will soon remove stimulus from the economy in any forseeable time in the futre? Heavens the stimulus is the only wheels Bernanke has to keep his trainwreck even rolling in my opinion. Remove stimulus from the economy? yes, and deal with the consequences of your actions! If those too-big-to-fail banks had been allowed to collapse like how things should happen in a capitalist society, and government lived with it's means, THEN you would set the stage for some real economic recovery.
Dan Bell thinks....really!.....a vision of recovery and an end to the mess and little Kiwi$ getting a boot in the goolies....The boot is always on the cards...a 50 50 bet considering the farce we have for an economy but the rest of his vision is all smoke.
The only real growth coming in the States is in the BS and spin sector..the lying about employment and pretty well everything else. "So watching the US employment figures over the next few months is going to be quite critical"
Dan Bell needs to think about the reported data he is watching....the data amounts to a very large and smelly pile of brown stuff.
Andrewj, it just gets positively better depending on your point of view.
There Goes The Sequester: courtesy of ZH
In other words, the entire apocalyptic impact of the sequester for 2013 was offset by one day's debt issuance.
Good piece on limits to debt (US in particular)
http://ourfiniteworld.com/2013/03/01/reaching-debt-limits/
Last point made about whether the existing financial system has efficacy/applicability in a shrinking economy is the million dollar question .. make that the trillion dollar question.
One of globalisations ideological claims is that no one is in control. When indeed I wonder do we hit the point of no return.
Kate you might be interested in the following articles:
1. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…
2. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…
I am sure you have a lot to say about this!!! ^^
Does this not constitute a bailout before a bailout ?
Telecom will split Chorus off into a separate company by the end of 2011 and CFH will invest NZ$929 million directly in Chorus with 50% being non-voting shares and 50% interest free loans.[3] For the other three companies, they will each form a joint venture known as a local fibre company with CFH: Whangarei Local Fibre Company Limited, UltraFast Broadband Limited. Read Wiki article
Exactly. Not alot different than the Solid Energy purchase of Pike Coal in the months prior to it (Solid Energy) similarly needing a bailout.
If I was a conspiracy theorist, I would suggest that John Key is on a mission to acquire private sector assets at the taxpayers expense, so that he can flog them off and subsequently bankrupt the citizenry.
Note Solid Energy are now looking to opencast mine Pike River. Wanna bet the Ministers will be in there like a dogs breakfast to see that that mining permit is amended.
Same goes for all the daft government subsidies going into irrigation for the corporate market and Landcorp competing with ordinary NZers who'd like to farm the land.
I was once critical that this government was hopeless at picking winners - now I think they're purposefully picking losers courtesy of the taxpayers.
Kate, im in the process of writing to the paper about the central HB irrigation project, which by the way has now been expanded to include my farm. Its just a rough sketch but you will get the drift.
Dear Sir/madam
I am becoming very concerned by the misinformation campaign by the HBRC regarding the Ruataniwha dam.
The dam's potential is overstated and completely unattainable with the existing water flows, something those supporting the scheme fail to accept, and in many cases they are also beneficiaries of the subsidized scheme.
80,000, extra cows on the plains would require a substantial subsidy both from rates payers, and from the environment, which would be invisible for several years and by then the damage would be irreversible.
The chairman has now announced a ten year 'no charge', for existing water users, a subsidy that could be worth as much as 50 million to existing consent holders paid by ratepayers to mostly wealthy, large scale farming enterprises. They then fail to account for the 6000 hectares of land they won't be getting income from for 10 years in their financial projections. When you change the number to more realistic ones, the rate payers 'reward' from the dam will be over a billion dollars more debt.
How did the CEO get the power to be so flippant with 50 million of rate payers money?
The banks behind the scheme will have all their loans backed by rate payers, so are very positive about the scheme. They cannot lose. In fact at a recent meeting at Tikokino bankers out numbered farmers, it shows just how much bankers stand to gain from the scheme.
We will see water owned by the HBRC, and the water going down the river to the sea will be charged to rate payers at 20c a cube,(check figure) something the HBRC conveniently forgets to mention.
The elected board of the HBRC need to become more informed, and in turn inform ratepayers of the limitations of the proposed scheme.
We don't need 'pie in the sky', think big projects that are flawed from the start, supported by self interest groups and guaranteed by hardworking ratepayers who stand to benefit little or in fact stand to lose substantially, both in damage to the environment and financially.
The Government is planning to give councils much more power to cut through resource roadblocks and limit the extent of objections through changes to RMA legislation.
To Quote Dr Jan Wright, an independent officer of parliament, charged with environment policy oversight, The proposals are “unbalanced”
.
Andrew
Yes, good on you. As you'll know I was quite keen to get a bach in CHB but stopped looking as soon as I could see what a millstone that scheme was going to be for ratepayers.
Have you got a link to where Jan Wright is quoted as commenting on Ruataniwha? I had a quick google and a look at the pce website but no luck. I suspect she sometimes tones down her language purposefully but on freshwater she's been a pretty good guardian.
As I now live in California thats a bit hard, but I was a local farmer and I tap into people much smarter than me.
Kate here is the link on the RMA
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…
Thanks - that lead to another;
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10868534
And the quote that is of interest is this one:
"It [the RMA] is not and should not become an economic development act".
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10868534
Even that's too kind to this government - development has the wrong connotation - economic disaster act would be more appropriate.
Im keen to see how they get on over here with feedlot waste.
In Amarillo Texas they fatten 7 million cattle in a 150 mile radius. I should go have a look.
"In the Amarillo area, if you draw a circle with a 150 mile radius, we produce 7.2 million head of cattle per year," says Greene, a nutritionist. "The general rule of thumb is each one of those animals will produce a ton of waste."
http://www.livestockweekly.com/papers/99/06/24/whlwaste.asp
Some feedlots
http://www.farmandranchjournal.com/index.php?option=com_content&view=ar…
the PR machine is well oiled but I suspect there is more to the story than meets the eye
The article on the meeting where more bankers than farmers turned up
http://www.fwplus.co.nz/article/still-no-price-on-dam-water?p=6
AndrewJ and Kate .. Follow the money .. who stands to benefit the most
An interested but un-involved observer. Might be more cynical than you. A couple of weeks back Kate wrote a piece about recent approval of a major irrigation scheme. I think it was down in Canterbury. Cant recall. But as I read it, the question that sprang to mind and rang the bell the loudest, was to wonder if there had been any transfers of large tracts of land inside the beneficial area within last 12 to 24 months. If so I would want to know who the buyers were and whether they had any relationship or association with any parliamentarians or civil servants who would or could have had prior inside knowledge of the approvals.
The very same questions could and should be asked about the Ruataniwha scheme. And who were the bankers? Retail Bankers? Investment Bankers? Merchant Bankers?
Do Bassett-Foss or Andrew Newman or any councillors own any land within the designated 30,000 hectare area?
All I know is that BNZ and ASB have been making house calls. Someone told me that the ASB guys are on commision.
I haven't heard of any interesting sales except one by Nat/Anz where one client took over a broke dairy farm, same bank both sides, money was good.
The problem they are having is that most farmers are aware that by the time you have installed the irrigation, paid for the water etc. the average farm will lose 1 mill of equity, so why bother?
I dont thinbk the farms are the profitable part, its the sale of Napier port and other assets, the rate payers as a back stop, the development costs and the new debt. The money is not going to be made on the farm end, its the parasites on the periphery that are planning to make the money. The ones that end up with the port , the other council assets and contracts to run stuff, thats where the rorts will be.
The rest of us will just be collateral damage.
So, the logic of that is, the farmers are a smarter than the suits, but the suits are prepared to throw $200+ million into a white-elephant?, $100 million in already?
ASB is one bank. ANZ another. But there were 40 bankers at the field day.
The un-answered question is .. what is the 30,000 hectares? Is it marginal land. Is it currently farmed?
Its all farmed, its a river plain, soils vary a lot, mostly free draining. The suits have a gold plated rate payer backstop. 6000 hectares is currently watered, that figure sounds too high to me but thats the figure i got. A lot of pumping will be required and piping or canals.
On my place they want to put a 30 meter wide canal which would have to be lined with something.
Its just the fact that it is been pushed ahead even though the numbers dont stack up, someone has an hidden agenda, the CEO knows what is going on, he spends alot of time in Wellington, but he's not telling us. They are even going to change the RMA and I think they will do a environment canterbury on us and take over the board to make sure it happens.
If this was Argentina, Brazil, India or Italy then it would be easy to draw a conculsion, to us this behaviour is something we are not accustomed to, and we don't know quite how to handle it.
... its the sale of Napier port and other assets
Load the region up with debt and then further accumulate by dispossession.
Its just the fact that it is been pushed ahead even though the numbers dont stack up
But they rarely do. Do you recall the Blue Bay motorcamp at Mahia, andrewj? When the council was considering the residential subdivision consent - it tried to tell the locals that 43 high end residential houses/sections would have a greater economic benefit than the 10,000 campers that used to visit the motorcamp annually.
And of course, the campers were sent packing, the house pegs, cul de sacs and street lights went in, the developer went bust and the sections are all still for sale;
http://www.realestate.co.nz/949848
Gotta be one of the most beautiful (and now, I assume, empty) beaches in NZ. I saw the new year in there at the motorcamp in 1999 .. and to think less than a decade ago some lot of elected officials voted to remove 10,000 visitors per annum from that local community.
Being honest, I have a lot to gain from the dam now. Its going to give me much cheaper water for my vineyard and much lower pumping costs. It would help with flooding and would increase the value of my farm (as long as the ratepayers subsidise me) If the rate payers give enough then I supose farmers will go for it. Its just doesn't feel right or fair to me.
If we hold out long enough how far will the council go to get the scheme up and running, before the rest of the province realises whats going on? They have offered existing consent holders like me huge discounts to get us on board, how much more will they give? how despirate are they?
I probably have more to gain than others. However I also know the water flow is not in the river but I mainly need water for frost protection in the spring, when no one else in the area needs it, so its cheaper, and always available. I have invested over 80k in my water bore in the last ten years. Will the council refund me the cost? Looks like it.
This is the regional coucil plan for my area I hope it opens.
https://mail-attachment.googleusercontent.com/attachment/u/0/?ui=2&ik=f…
Yes, it WAS a certainty that the value of the farms within the beneficial areas would rise .. the councillors would have a hard time if it were otherwise .. but the question remains unanswered .. do any of the Regional Councillors (or associates, or family, or relatives) own land within the beneficial areas. if so they should NOT be participating in the decision making .. otherwise it is corruption ..
I'm just following and responding to AndrewJ's posts on the Dan Bell thread .. where he says he's in the area .. and the value of his farm will go up .. I understand that there are 25 soil types in the region .. got that .. when you have close to $1 billion being touted around .. and the banking suits are knocking on the doors canvassing .. you have a lot of smoke and mirrors going on .. and Andrew Newman says this will be a done deal by September 2013 .. then anticipated land prices will inflate ahead of reality .. whether they get them or not that's another question ..
What else could Andrew Newman say?
"We have questions about the water resource, the cost of water is too high to be proftable for pastoral farmers, the supposed environmental benefits are actually proving to be negative, and the private sector will only fund this if there are public sector guarantees and subsidies."
No, he has his orders, and is aggresively following them. "This will be a done deal by September 2013". Sure - must keep up confidence even if the wheels appear to be coming off.
Does Andrew already know the EPA decision to be reported back in January 2014? The result of this year's local government elections? Public responses to government subsidies for agricultural intensification?
May Andrew Newman live in interesting times.
Here is something from last year with Diesel the valuer
http://www.interest.co.nz/rural-news/58378/record-sale-conversion-farm
by diesel | 20 Mar 12, 9:34pm Hi Henry,
I didnt say I was using an average or a rule of thumb. Productive potential is driven from kgdm or MJME avaliable from growth cycle. While the Templeton soils are good, especially given they dont limit the soil temprature due to overly high water holding capacity, the productive potential under effective spray irrigation is not massivly different of that of a mid grade Lismore.
and from what we have seen its broad brush, of dryland or irrigated in pre-scheme values.
The scheme people usualy frame it as farm system type. And its valuation, not the cash price someone paid - everybody wants to become a developer.......
Land agents for sub 250ha place just run round with comparative sales as a value basis, they may as well be flogging houses - slagging off the banks for using productive valuation calc's for mortgage..
Above that the farm system really drives value - we think.
We have been meaning to put this up for ages:
http://pasturetoprofit.blogspot.com.au/2011/01/crash-burn-dairy-farmers…
NZ dairyfarmers have gone mad & paid rediculous money for cows & land now both have crashed & some dairyfarmers will burn! Two years ago land prices in NZ got up to NZ$70 per kg of Milk Solids (the way land is often valued in NZ) today they are max NZ$40 & some farms are selling nearer to NZ$20. Two years ago dairy cows peaked at NZ$2000 today they are less than NZ$1400. Why? They went mad thats why! With total disregard for cashflow/profit or decisions based on commonsense some have made crazy investment decisions!
and then this comment:
I would be one of those Canterbury dairy farmers you refer too who has done the impressive capital development and has a scarey amount of debt ( your words not mine).
Sure there are a small number of farmers who went a step too far financially and/or did not have the capability to manage their business effectively. However I would dispute your suggestion that ridicules money was paid for cows and land. That depends on your long term view of milk price and interest rates and what is a satisfactory return on capital for a dairy farm in Canterbury.
In the area I farm the top priced farm sale was $50000 per hectare for a cropping farm purchased by a vegetable grower. At the same time land on not as good soils but just as suited to a dairy conversion was selling for $35000 - $40000 per hectare. In 2007 I converted a 325ha cropping farm to a dairy farm at a cost of $8000/ha, nothing too scary about that. Add Fonterra shares $7000/ha and stock at $8000 per hectare and machinery at $1000/ha and you have an all up cost at the peak of the market of $59000 to $64000 per hectare for a property that would produce 1500 milksolids per hectare.
Land, buildings and Fonterra shares $50000 - $55000 /ha or $33 to $37 per kg milksolids.
That sort of farm can comfortably be run with farm working expenses of $4.00 per kg milksolids, sharp operators would have a lower cost structure and/or higher per hectare production. At a $7.00 Fonterra payout that leaves $3.00 surplus or $4500 per hectare giving a return on assets of between 7% and 8% pre tax. Not too bad comopared with other investment choices in my humble view.
On current asset values the return on assets is more like 10%. I think that is too high and expect asset values to rise significantly if the milk price stays around current levels.
Tom, to convince me that I and a lot of my farming contemporaries paid too much for assets in the past you need to put up a compelling argument for a significantly lower long term milk price for NZ dairy farmers.
Each to their own......
If they give 10 years free water to exisiting users that kicks the project's NPV into significant negative territory (using an 8% discount rate and 35 years it was supposed to just turn positive in year 35). Now take $18 million off that and I find NPV doesn't ever turn positive.
But then I don't model electricity generation revenue before the dam is completed.
What is changing with dairy are the input costs each year and where irrigation is concerned, additional costs of $15-1600/ha per year for irrigation equipment costs and $750-1100/ ha per year for water costs. Current users seem not to be acknowledging these future water costs.
In the Ruataniwha area, all these charges are whether water is used or not and as an early (not referred to any more) report noted, water was only needed in about one year in 10 (compared to other options available).
If the cost of the additional feed grown from irrigation under this scenario is then calculated correctly, the marginal value of the extra milk is negative.
Where Regional Councils are actually aware of environmental impacts and are signalling N loss limits, this will further limit potential pasture growth advantages from irrigation.
If these spects are also taken into account, benefits from irrigation become even more negative.
Interesting, of course those charging for the build get their money up front and can then run. Ive seen some comments that seem to get repeated and repeated time and time again...the marginal costs are just too high...so what happens is we see a pter to rob paul situation ie the good profit on the easy to do gets shunted to cover the marginal costs...its self-defeating, so why do it? With no CGT does it make sense anyway? ie what sort of tax distortions are happening that makes doing the stupid thing "profitable".
regards
So right steven.
Existing profit is being undermined by "intensification" undertaken using interest only loans which then put farms at future "mercy" of banks who show no mercy of course.
Check out any of the irrigation "budgets" and you will find no capital repaid, comparisons of pre and post on an EBIT basis when capital expenditure is often $35,000 per ha; inflated production figures and areas able to be irrigated, plus currently possible productivity improvements (such as production per cow with no irrigation) being attributed to irrigation alone. Add to this the benefits in Ruataniwha scheme of "up to an additional 20,000ha intensification possible over and above that being irrigated".
WHAT? If this was the case it is possible over the WHOLE area now and if that sum was completed it would then be a much fairer comparison pre and post scheme.
The problem is that it would show what a huge loss making undertaking (for ratepayers and farmers but not contractors and banks) the CHB scheme is. And as alluded to, with Port of Napier and other tangible assets now up for grabs, some wonder if that is really the end game.
You are right. For a farmer now, the numbers do not stack up. The income gained after the scheme does not justify the costs. The promoters are dealing with this problem by jacking up the revenue and asset value assumptions.
Its the Australian bankers way: just do the projetc and collect the fee.
http://www.theage.com.au/business/brisbane-toll-road-operator-hits-the-…
If only the farmers could put in the equity once the scheme was complete, and pay the promoters what it is worth to build and use. Better still pay the promoters in milk kg.... let the promoters assume they have been paid if actuals differ to forecast..
The policy folk just want more export volume for NZ INC, incomes to producers mean nothing to them. The banks don't worry as they get the dairy income stream ($1.2 for each kg) and first right to the land etc.. etc...
So to those two, the supply chan with fonterra leading from the front all looks a ok.....
Any way the history in some of the SI border dyke schemes was that govt paid us about half the earthwork costs. Then to pay the loans on the balance, we had to stop sheep and move to dairy. Borrowing again.
The great problem is that no groups of farmers have equity $ to put into anything, its always borrowed. and with scheme like this no one plans/counts/imagines on paying back the loan.
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