By Roger J Kerr
The Kiwi dollar has abruptly retreated to 0.7100 from its highs of 0.7319 against the USD reached on 12 July.
The previous positive mood and sentiment in the forex markets towards the NZ dollar has been reversed as global financial market events move past Brexit and the RBNZ throw a curve ball to the local market.
The strong buying of the Kiwi dollar over the past two months that drove the NZD/USD rate from 0.6800 to 0.7300 was due to our interest rate yields offering 3% in a world of 0% interest returns, an expectation by many that the RBNZ was finished with cutting the OCR due to relatively strong NZ economic data and New Zealand being seen as a safe-haven destination whilst there was so much uncertainty in the UK and Europe with the Brexit referendum.
However, those positive factors for the currency were in the end insufficient to attract new buyers at levels above 0.7300.
The retreat from the highs has been swift, caused by a combination of developments:-
- The RBNZ unexpectedly announcing last week that they would update their economic forecasts this Thursday 21 July with an unscheduled and unprecedented “economic assessment” between the official announcements of the 9 June and 11 August Monetary Policy Statements. The RBNZ statement was a surprise to the market and immediately sent the NZ dollar downwards. For some unexplained reason there was no OCR review scheduled between the MPS dates, as is normally the case. The mere fact that the RBNZ decided to make this special release indicates that their economic forecasts and outlook have changed since early June and the need to inform the market. The TWI Index being some 10% above their assumed level certainly pushes tradable inflation lower for longer. The RBNZ’s tactics would be to also create more uncertainty around their OCR decision on 11 August after the interest rate market started to price a very low probability of an OCR cut.
- The US dollar itself has made gains against the Euro, Pound and Japanese Yen as US economic data prints on the stronger side and a September interest rate hike by the Federal reserve is still very much a live possibility. Recent political events in Turkey will be a reminder to FX markets that tension and turmoil is never far from the European economy, thus negative for the Euro and positive for the US dollar.
- Currency speculators who drove the Kiwi dollar up from 0.9200 to above 0.9600 against the Australian dollar, after the Aussies cut rates in May and we failed to cut our OCR in April and June, would inevitably take their profits at some point. The surprise RBNZ announcement last week was just the catalyst these punters needed to reverse their positions and start selling the NZD against the AUD. The NZD/AUD cross-rate has recoiled smartly from 0.9600 to below 0.9400. Interest rate differentials still point to a much lower NZD/AUD rate.
Whether the NZD/USD rate continues its slide to below 0.7000 over coming days and weeks will depend on how much the RBNZ change their tune this Thursday, today’s CPI inflation result for the June quarter (below +0.60% will be NZD negative) and the next GDT wholemilk powder auction on Wednesday 20 July.
Dairy market commentators see the potential for softer prices in the short term as seasonal volumes increase before any recovery can commence in the medium term.
Another potential negative variable for the Kiwi dollar are rumours and fear-mongering that China could seek trade retaliation against New Zealand after we have reportedly joined the Americans in accusing the Chinese of dumping inferior quality steel into our market.
There is no evidence of official Chinese displeasure that would spark a trade war and potential tariffs on our dairy, meat and horticulture exports into China.
The media reports may be exaggerated, however the newswire headlines would be enough to dissuade Kiwi dollar buyers as our economy is now so dependent on China for trade. Thankfully, our FTA deal with China spells out very prescriptively how any isolated disagreements and disputes are handled so that free trade continues.
The gloss has come off the Kiwi dollar and further shine will be lost if any bank lender to the beleaguered dairy industry breaks ranks and starts being heavy handed with debt foreclosures.
To date, there has been very little news of banks forcing debt reduction from asset sales in the dairy sector. It seems inevitable that some of the larger and highly indebted dairy farming concerns in the South Island will succumb to bank pressure and the news will hit the headlines at some point.
From an international observer and Kiwi dollar investor perspective, tangible evidence of debt and financial strife in our largest industry will be reason to take a less positive view on the NZ economy and currency value.
A return to NZD/USD rates below 0.7000 seems likely over coming weeks, particularly if the RBNZ lower inflation forecasts (yet again!) and slash the OCR on 11 August and signal potential further cuts at the same time.
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