Opinion: NZ uniquely placed to climb out of recession as a food exporter

By Roger J Kerr Will the Kiwi Dollar defy the doom-merchants? The general sentiment in the marketplace and amongst local economic commentators is that the NZ dollar is destined to depreciate substantially below its current 0.5000 towards 0.4000 against the USD. The economic news, which currency values move on, has certainly been negative for the Kiwi dollar of late:-  

• NZ Government credit rating on "negative" watch from Standards & Poor's.
• NZ business confidence collapsing in the latest NZIER QSBO survey.
• Interest rates being slashed aggressively by the RBNZ to 3.50%.
• Fonterra also slashing dairy farmer's milk-solids payout to $5.10.
• The Australian dollar weakening back to 0.6350 against the USD after a foray to 0.7000 over the Xmas/New Year period.
• The US sharemarket/Dow Jones Index experiencing its worst January ever, the Kiwi dollar being correlated to US sharemarket direction due to general risk aversion increasing/decreasing with global investor sentiment in US equities.

  The Kiwi has depreciated from 0.6000 to 0.5000 due to these factors.

The NZ economic outlook for 2009 appears to become bleaker everyday with local bank economists and the RBNZ looking to global economic news ands concluding that it is inevitable that the NZ economy will contract somewhere between 1% and 2% this year. They see our export commodity prices continuing to fall through this year, thus no chance of any economic stabilisation/recovery. Will these dire predictions of doom and gloom, which the lower NZD forecasts are predicated on, turn out to be fact? Time will tell, however more recent international market supply/demand information on our key dairy, beef and lamb export markets suggests that prices are now stabilising. The world still needs to buy food, and when the market supply/demand equations are met, prices will stabilise as the underlying demand for protein is still there. New Zealand in some respects is uniquely placed to climb out of recession earlier than others because we are an exporter of food, not discretionary consumer products. The NZ dollar forex market and the NZ sharemarket will be the first signposts to signal this potentially favoured position for New Zealand over coming months. Eventually business and consumer confidence will improve as well with the record low interest rates for borrowers improving domestic discretionary spending. The FX and share market (unlike economists working off much delayed historical data) price-in future expectations everyday, therefore they will be first to reflect the road to economic recover. The current doom-merchants may prove to have gone too far when 2009 is looked back on in 12 months time. There is a slightly better than 50/50 chance that the NZD does not go much below 0.5000, as all the bad news is fully priced-in and it is getting more difficult to see how much worse the economic news can become. The relationship between the NZ and Australian economies and the respective interest rate movements of the two currencies will be important to future NZD/AUD cross-rate movements and general NZD direction. It may be very unwise for the RBNZ to take NZ interest rates below those of Australia if we want to keep attracting voluntary capital inflows to fund our large Current Account deficit. It does not seem likely that the NZD/AUD cross-rate will go below 0.78/0.79 on this down-cycle if there is a belief that the NZ economy will recover ahead of Australia and our interest rates will start to increase later in the year, ahead in time over Australian interest rates. There comes a time when a currency that has depreciated more than 30% over a short space of time cannot fall any further, as all the speculative funds invested in the currency have long departed and the selling pressure is exhausted. There is no fresh speculative interest to sell the NZD down from here. All the hedge funds and investment banks that use to play in the Kiwi dollar have far greater problems of their own to contend with than to trade a small South Pacific currency. The British Pound in recent weeks has shown a resilience to recover value out of a slump when all the bad economic and financial news is out and there is no new reason to sell it. The Kiwi dollar may well be approaching a similar zone, thus a lower value to 0.4500 and lower is not as assured as many predict. * 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