Roger J Kerr sees a likely 'sideways shuffle' in the value of the Kiwi dollar and then rising back above US70c in the medium to longer term

Summary of key points: -

• Kiwi moves down despite hawkish RBNZ
• Government complacency and inaction has failed the NZ public and economy

Kiwi moves down despite hawkish RBNZ

It has been a volatile and highly uncertain period for the NZ dollar foreign exchange market, as well as for life in general in New Zealand over this past week.

The immediate depreciation of the Kiwi mid-afternoon last Tuesday as the Covid delta strain outbreak was announced reflected the “here we go again with another lockdown” from most folk.

The NZD selling against the USD from above 0.7000 to the low 0.6800’s also represented an immediate pricing-out of interest rate increases by the money markets, with the RBNZ Monetary Policy Statement due the next day.

The RBNZ chose a prudent and sensible response to the rapidly changed environment with essentially postponing the planned OCR increases to another day.

However, subsequent statements to the media by Governor Adrian Orr made it very clear that they are immediately embarking on a path to unwind last year’s monetary stimulus measures, as the economy no longer needs it.

The RBNZ’s statement was overtly hawkish and would have sent the Kiwi dollar one or two cents higher had the Covid outbreak not occurred.

The RBNZ’s new stance is a dramatic sea-change from their stated position of “looser for longer” of only a few short months ago.

They do seem to be knee-jerking somewhat to the short-term lifts in employment and inflation in the June quarter. As this column has stated previously, the buoyant conditions in the housing and retail sectors (that the RBNZ is responding to) are not only debt fuelled, but do not reflect the wider productive side of the NZ economy where trading conditions are a bit tougher.

On the inflation front, the ongoing debate as to whether the recent increases are temporary or permanent has not been settled either way.

Oil and commodity price increases earlier this year are now quickly reversing, supporting the temporary case.

The RBNZ failed to recognise this more recent development in their monetary statement. However, continuing and increasing shipping/freight/supply chain costs and disruptions points to more permanent price increases across the economy.

The RBNZ’s stated objective to be the first central bank in the world to increase interest rates (back to 2.00%) is certainly positive for the Kiwi dollar on its own in the medium term. However, in the short term the continuing strength of the US dollar on global FX markets (as we anticipated for this period), coupled with the Covid community outbreak and economic lockdown are pressing the Kiwi lower.

What was a surprising with the RBNZ’s monetary policy decisions is that they are continuing with their “FLP” Funding for Lending Programme wherein they provide cheap/direct debt to the banks to on-lend into the economy.

All that money has gone into home mortgage lending (not into business or agriculture where debts levels have reduced) and fuelled the residential property bubble.

The Aussie-owned banks are in strong enough positions to fund their own books from retail and wholesale deposits. If the banks have to pay up with higher interest rates to attract their own funding in, so be it.

We have operated under a two-tier interest rate environment previously with retail bank deposit interest rates considerably above wholesale/OCR interest rates. Abolishing the FLP is one way the RBNZ could tighten credit conditions in the economy without shoving the OCR and NZ dollar up too steeply and hurting the income-generating export sector.

Our consistently held view since February that the NZD/USD rate would drop below 0.7000 to 0.6800 has been fulfilled.

The NZD direction from here over coming months will be dependent upon the following two factors, which on balance favour a sideways shuffle in the short term and then back above 0.7000 in the medium to longer term: -

• Global FX markets will have all the US dollar positives (Fed tapering of QE and interest rate increases in late 2022) fully priced-in to the EUR/USD rate over the next two months. The stronger USD trend running out of steam at the $1.1600/$1.1500 area against the Euro and reversing to USD weakness in late 2021 and 2022 due to the negative US dual deficit position.
• The RBNZ potentially unwinding the 2020 monetary stimulus too quickly with OCR increases over coming months that attracts in the offshore “carry-trade” punters and sends the Kiwi dollar up on its own accord (refer NZ:US 2-year swap interest rate differential chart below).  

There is no real excuse for USD exporters not being sufficiently hedged against the above two risks.

Government complacency and inaction has failed the NZ public and economy

It has become increasingly apparent that NZ businesses and households have been short-changed by the current Government though their complacency and inaction in handling the pandemic and thus the economy over the last 12 months.

Consider the following: -

• “There is no rush to vaccinate the public as we don’t have Covid in New Zealand” - yeah right!
• “It is not a race to get vaccinated, other countries have a more urgent need” – do they represent us or some other people?
• “Covid elimination strategy remains the objective” – many other countries have realised they need to live with Covid and have moved on. Our hermit kingdom has no risk management, no plan and no targets to re-open the borders. Ardern’s gamble in this respect has failed.
• The PM’s PR spin does not disguise the fact that over the last 17 months the Government has done nothing to increase MIQ facility capacity, increase ICU capacity in our hospitals, upgrade the MIQ booking system to something that is equitable/works and dramatically increase vaccination rates when it has become obvious that this was the best pandemic/economic risk management policy. There is no urgency on anything.
• Due to the aforementioned Government ineptitude, Amazon have taken their second LOTR TV series to the UK and Sail GP yachting is not coming to the South Island. New Zealand’s reputation for accommodating and hosting international business, investment and events has been tarnished. Opportunities squandered through political ideology and narrow mindedness.
• Unbridled fiscal and monetary stimulus last year has created a speculative housing bubble that could burst badly.
• “Re-setting” our immigration policy and the “re-structuring” the health system in the middle of a pandemic and chronic labour shortages in major industries is total madness and underlines how far removed the current Ardern Government ministers are from reality at the coalface of the economy.
• “Shovel-ready infrastructure projects” were a myth. Commuters in South Auckland will continue to suffer hours to get to work for a few more years yet because the Government stopped the new Mill Road motorway build. Dunedin has beautiful three-lane motorways with a few vehicles on them. Maybe Dunedin has smarter politicians doing the lobbying in Wellington!

Phew! got all that off my chest, but what does it all mean for the economy and currency value? The current “don’t plan, only react” approach is not positive for either and needs to change.

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.