By Roger J Kerr
Whilst the NZ dollar has traded in a relatively wide 0.6700 to 0.6250 range over the last two weeks, the overall resilience and stability around the 0.6500 area is reassuring for the currency.
Through the turmoil of wildly fluctuating global financial and investment markets the fact that the Kiwi dollar has held its own is testimony to the view of this column over recent weeks that the speculative selling against the Kiwi dollar is largely exhausted.
The “flash crash” in global equity markets on Monday 24 August certainly propelled the NZD/USD exchange rate sharply lower to a new five year low of 0.6250. The plunge proved to be very short-lived, as within a matter of minutes buyers emerged and the NZ rebounded immediately to above 0.6500.
Local exporters with NZD buy orders placed in the market with banks as “flyers” were well rewarded as they transacted at rates in the 0.6300’s and 0.6400’s. Standing back from the daily noise and volatility of the NZ dollar FX market, it is becoming very apparent that the side-ways movement at 0.6500 since mid-July is forming a bottom to the downtrend that has run from 0.8800 in July 2014.
It is arguably still too early to be absolutely certain that the ultimate bottom has been reached, however the longer the Kiwi dollar displays “Waisake Naholo syndrome” type powers of recovery, the confidence around this view will increase.
Many economic and currency commentators are citing the possibility of a catastrophic economic and market meltdown in China as a reasons to remain firmly negative on the NZ dollar.
Whilst New Zealand and Australia’s economic dependence on China is well documented, the recent 40% plummet in the Shanghai stockmarket (following a 150% rise over the 12 months previous) does not mean that the whole Chinese economy has come to a shuddering halt.
As expected, the Chinese authorities have both monetary and fiscal policy capacity to add stimulus to their economy to ensure that the slowing growth rates are not damaging.
Many question the accuracy of Chinese GDP growth measures, but the reality is that China has massive financial reserves to shore up their economy and continue 6% and 7% GDP growth rates. The immediate interest rate cut by the People’s Bank of China on Tuesday 25th August restored stability and calm to global financial/investment markets. There are certain public expectations of jobs and income growth in China that their Government is seemingly obliged to deliver by maintaining high GDP growth rates. The Chinese authorities’ biggest fear is civil unrest if those aspirations are not fulfilled, therefore they will apply their monetary and fiscal firepower to manage that risk.
The transition of the Chinese economy from infrastructure investment to consumer spending was never going to be without its road bumps. For these reasons the fearmongering around an imminent Chinese debt crisis, credit crunch and associated economic meltdown are exaggerated in the extreme.
What also seems exaggerated is the sudden decline in consumer and business confidence in New Zealand following the collapse of dairy prices. Two factors suggest that both the consumer and business survey respondents may have misread the market and economic situation:-
- Whilst dairy farmer incomes are low for the second year in a row, the dairy industry is not the whole economy and other industry sectors remain strong across the economy e.g. construction, services, tourism, manufacturing, residential property and retail.
- Wholemilk powder (“WMP”) prices have already rebounded from the lows of US$1,500/MT to US$1,850/MT and look set to move higher as Fonterra limits supply onto the GDT auction platform. Whilst a perfect storm of negative forces caused the dairy price collapse, in the medium term the level of global supply and demand has not fundamentally changed. A more rationale view is that WMP prices will return to their long-term average between US$3,000 and US$3,500/MT.
From the current levels of 0.6450 a continuing recovery in dairy prices and a RBNZ Monetary Policy Statement on 10 September that is less dovish than what the markets expect stand as two Kiwi dollar positives. A potential negative for the Kiwi is a stronger US dollar against all currencies after it weakened on the flash crash last week. However, a delay by the US Federal Reserve to their first interest rate increase in 10 years scheduled to be announced on 18 September will temper any US dollar gains in the currency markets.
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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