By Roger J Kerr
The four and a half cent depreciation (5.7%) in the Kiwi dollar against the USD over the last 10 days from 0.7850 to 0.7400 has been entirely due to offshore currency market/economic events and developments.
Some of the changes have been reasonably predictable (i.e. ECB QE money printing), however most have been a surprise (i.e. Swiss abandonment of their currency peg, the Canadian central bank interest rate cut and a far left political party forming a new Government in Greece).
Looking at the week ahead, for the sake of less volatility in the NZ dollar FX market let’s hope the RBNZ and US Federal Reserve are not delivering more surprises to the markets with their respective confirmations and forward guidance on monetary policy settings.
Any hint of a waiver in the Fed’s language from US interest rates increasing sometime in the third quarter this year will be sufficient for the US dollar buyers of late to become sellers i.e. weaker USD and Kiwi up.
Locally, the financial markets and the economic forecasting fraternity have convinced themselves that the RBNZ will remove the monetary policy setting bias away from interest rate increases in 2015 to a much more “neutral” stance.
I would not be so sure that the RBNZ will change their fundamental position so abruptly just because we have seen some financial market volatility over the last month, oil prices collapse and Euroland attacked by deflation. Remembering that the RBNZ “look through” first round oil price changes in measuring inflation and monetary policy determination.
The RBNZ will mention these recent events in Thursday’s OCR review statement; however one could put up many counter arguments to the recent view that inflation is dead and buried in the NZ economy.
Price increases are on the way in 2015 from rents, high capacity utilisation in manufacturing, food (due to dry weather conditions), electricity (lake levels are low again) and imported consumer items due to the 18% depreciation of the NZD against the USD over the last six months.
The RBNZ will be more cautious and not as complacent on the inflation outlook compared to where most economic commentators have taken themselves to over recent times.
Watch for a Kiwi rebound upwards before and after Thursday as the RBNZ and Fed are more likely not to change their tune too much from their December statements.
In summary, the NZD/USD rate at 0.7400 is trading lower than where we would have expected buying support in the 0.7500/0.7600 region.
USD exporters should be increasing hedge percentages at these levels.
The NZ dollar has under-performed the AUD against the USD over recent days, a market situation that does not look sustainable given our respective commodity price movements of late (metal prices lower, whereas wholemilk powder is stabilising).
As you stand back from the day-to-day FX market noise, it would not be advisable to become too bearish on the Kiwi dollar at 0.7400 given that the 4% interest rate returns available from a well-performing economy will still make us a very attractive and safe destination for global currency investors.
The Prime Minister was at the Davos jamboree last week and New Zealand’s economic performance of late would have been noticed, admired and revered. Therefore it is difficult to see continued currency depreciation for us on any sort of comparison relative to the rest of the world.
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Roger J Kerr is a partner at PwC. 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
4 Comments
Roger,
One would hope that Mr Wheeler is not as selective in his use of data as you continue to be. He has already missed not only his target of 2%, but even the band of 1-3%, and although yes, he may reasonably look through the oil price impacts in the short term, he should similarly look through tobacco and electricity counter moves higher. As well, oil looks like being low for some time, in which case his average over time has to take them into account.
The depreciation over the last six months on the TWI has been about 3%. The Chinese, Koreans, Japanese and Germans are not going to increase their prices in the current market, while nearly all commodities have dropped in USD terms far more even that the depreciation against the USD. Do we really import much from the US, even if many prices are set in USD? Annual inflation to this quarter looks like being closer to 0% than 1%, so he needs a year or two at 3% to hit his average.
Will even food prices climb in a drought; many are now imported, or based against international prices? The counter is that demand from farmers for a whole bunch of things will surely be well down, primarily because of dairy prices, but also any drought.
The only major market pondering any interest rate increases is the US, and it would not even be a shock if they blinked. Meanwhile is the drop in the oil price effect on Canada really bigger than the diary price fall here?
You seemed surprised by the Swiss peg dropping, and the Syriza party winning in Greece. The latter have led the polls for months, while as soon as the Eurozone was to print $1 trillion, the Swiss peg had to go, albeit with the Swiss having printed themselves a free 300 billion Euros while it lasted.
Mr Wheeler would have some explaining to do if he leaves open any suggestion of a rate increase in 2015. Even now he needs to explain how he is likely to get to 2% average over a business cycle (unless he drops that as his top priority); all the current risk looks on the downside.
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