Roger J Kerr recounts where the NZ dollar has been in a topsy turvy year and looks ahead

By Roger J Kerr

The New Zealand dollar is set to end the year very close to its value of 0.6800 against the US dollar where it commenced 2016.

Along the way the Kiwi dollar has displayed its normal wide-ranging volatility tendencies having reached lows of 0.6400 and highs of 0.7400 through the course of the year.

Whilst it was Chinese economic worries and the resultant share market slump that caused the weakness to 0.6400 in the January/February period, it was superior NZ economic performance and an interest rate advantage over the US currency that caused the impressive rally upwards from 0.6400 to 0.7400 in the middle part of the year.

As the year comes to a close it has been the “game changing” election of Donald Trump that has spurred new found confidence in US economic growth and thus a resurging US dollar in global currency markets.

The strengthening US dollar from the shock US Presidential Election result was reinforced with last week’s more upbeat assessment of the US economy and projected 2017 interest rate increases from Janet Yellen at the Federal Reserve.

The US interest rate markets were only pricing-in one to two 0.25% increases in official interest rates for 2017 prior to the Fed meeting, however the Fed are indicating three 0.25% hikes next year at this point in time.

Certainly, the US economic data and inflation trends justify the slightly faster track to normalising US monetary policy.

As a result of the general US strength the NZD/USD rate was pushed below key technical/chart points and has traded below 0.6950 for the first time since early June.

On a Trade Weighted Index basis the overall value of the NZ dollar has not depreciated as much with the TWI now at 77.50, only marginally down from its 2016 highs of 79.13.

The TWI hit a low of 70.36 on 20 January 2016 at the height of the sharemarket sell-off. The recent weakness of currencies such as the Chinese Yuan and Japanese Yen against the stronger USD have pushed these important trade cross-rates substantially higher.

The NZD/AUD cross-rate also remains stubbornly high at 0.9550 for companies selling in Aussie dollars into our major export market.

The Reserve Bank of New Zealand would still see the TWI at 77.50 as being over-valued against key economic fundamentals such as the Terms of Trade Index (import and export prices).

Looking ahead into 2017, the following factors are seen as influencing the NZD/USD currency movements:-

• Whether the new Trump Administration in the US starts to deliver economic policy changes in line with the election campaign promises? The markets have so far embraced the expected growth/inflation boost the promised infrastructure improvements will bring, hence rising US interest rates and the stronger US dollar. If the Trump action does not meet the words the markets may display disappointment and the Trump rally for shares and the USD may start to unravel.
• How will global financial and investment markets react to the rising geo-political and trade tensions between the US and China as President-elect Trump takes a much harder and different approach to the relationship between the two global economic super powers. Increased market volatility from this source will be negative for the Kiwi dollar. The Kiwi dollar was sold down below 0.7000 last Friday on market nervousness around what the Trump hard line means for the Chinese economy going forward.
• Will whole milk powder prices continue to climb in 2017 on top of the impressive gains in recent months from US$2,000/MT to US$3,600/MT? Global supply and demand trends through the crucial January and February period in international dairy commodity markets may set the tone for the rest of the year. Increased US exports into the globally traded market seem likely to limit further price increases. Therefore, fresh NZ dollar appreciation from further substantial increases in dairy prices in 2017 seems less likely.
• The NZ dollar remains significantly over-valued against the AUD at 0.9550 against the two key lead-indicators for the cross-rate. Both the interest rate differential and commodity price differential between the two economies point to a cross-rate below 0.9000. At some point investors and speculators will recognise this currency miss-alignment and sell the Kiwi dollar against the AUD.
• The New Zealand economic story remains impressive and superior to comparatives, hardly a recipe for currency depreciation. However, political risk may feature later in 2017 if the new Bill English led National Government starts to lose ground in the political opinion polls. The risk for the economy and currency revolves around a potential hung-Parliament relying on minor parties to get anything done after next November’s general election.

The NZD/USD exchange rate in its current range of just above and just below 0.7000 is at a competitive level for our USD importers and exporters. Therefore, major movements well above or well below this area in 2017 do not seem likely. 

Roger J Kerr contracts to PwC in the treasury advisory area. 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