By Roger J Kerr
The New Zealand economy continues to bubble along, as evidenced by a very strong PMI services forward indicator last week. Whilst the growing demand for skilled workers continues the strong immigration inflows will also continue.
In turn, that is driving the massive increase in residential construction activity. Therefore, architects, engineers, lawyers and all other service providers to the domestic economy are flat stick.
One only hopes that quality standards are not compromised with all this higher demand and activity levels.
It is not only businesses in the domestic economy that are expanding and demanding skilled workers, export companies are also expanding. In particular, niche manufacturing industries which are the New Zealand economy’s unsung heroes.
Despite the overall exchange rate level (the TWI Index) being near record highs at 78.20, our manufacturing exporters selling product largely in USD and AUD have addressed costs and efficiencies to remain profitable.
Food and manufacturing exporters selling into the highly competitive Australian market have adapted and adjusted to a NZD/AUD cross-rate now consistently above 0.9200.
A number of years ago these exporters would have said that they would not have been profitable above a 0.9000 exchange rate.
It was interesting to observe in a recent PwC global survey of company CEOs that New Zealand CEO’s were not as concerned/worried at the risks of volatile exchange rates as their counterparts internationally.
Given that the NZ dollar remains one of the most volatile and traded currencies in the world, the clear message was that New Zealand companies manage their FX risks more actively than elsewhere.
New Zealand exporters in AUD, GBP, EUR and JPY have needed to hedge their currency risks for much longer terms in recent years. Lucky that they have, as all these cross-rates have increased substantially over the past 12 months.
Exporters in USD’s who have hedged at levels in the mid-0.6000’s 12 months ago have also seen the benefit of active currency hedging programmes. If particular exporting companies have not been hedging these currencies to protect multi-year profits and cashflows, their shareholders should be asking serious questions of the respective Board of Directors and management.
The strong NZ economic fundamentals continue to counter the stronger US dollar on the global stage, leaving the NZD/USD exchange rate range-bound around 0.7100/0.7200, as was anticipated through this period.
The USD has strengthened to $1.0560 against the Euro and further gains are likely if the Trump state of the nation speech Tuesday night provides more detail on US corporate tax cuts and infrastructure investment plans.
Currently there are no powerful reasons to buy the NZ dollar and likewise no compelling reasons to be selling it either. The sideways movement will continue until some global risk event or unexpected economic development causes a change in sentiment.
Typically, it is whole milk powder (WMP) commodity prices that are the wildcard that tips the balance up or down for the Kiwi dollar. Right now WMP prices are also going sideways, although weaker prices seem more likely over coming months as Chinese import warehouses are reported as full already.
My assessment of the global landscape is that they only potential event risk this year is political changes in Europe that throws doubt on the whole European Union structure.
For the financial and investment markets this will not be a great surprise, unlike the unexpected surprise events of last year of collapsing oil prices, China worries, Brexit and Trump. Local political risk will only have a negative impact on the Kiwi dollar if the Greens/Labour coalition start to close up on National in the political opinion polls over coming months.
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