By Roger J Kerr
The NZ dollar has made steady gains against the US dollar over the last 10 days, appreciating from rates below 0.6300 to sit more comfortably above 0.6450.
The solid performance by the Kiwi dollar has been “off its own bat”, the US dollar has not weakened against the major currencies, nor has the Aussie dollar lifted through this period. The move up in the NZD/AUD cross rate from below 0.9000 to 0.9150 over this last week is evidence enough of the independent NZD strength.
As has been highlighted in this column over recent weeks, the FX markets were taking sometime to re-rate the Kiwi dollar upwards on the spectacular rebound in dairy prices witnessed since early August. However, that recognition of the direct linkage between the price of our largest commodity export (wholemilk powder – “WMP”) and our currency has belatedly arrived and the Kiwi has posted gains on its own accord.
The GlobalDairyTrade dairy products auction on Wednesday morning this week will confirm latest WMP futures pricing of another price increase well in excess of 10%. The early and substantial rebound in WMP prices, coupled in with recovering log export prices and still record high beef prices, suggest that the RBNZ alternative scenario cited in their recent Monetary Policy Statement of higher primary industry export prices would require them to revise upwards both their GDP growth forecast and interest rate future track.
The 29 October OCR review from the RBNZ may potentially have a much more positive tone to the outlook for the economy and thus less certainty about the expected fourth OCR cut to 2.50%. If the 16 October CPI inflation result for the September quarter is above prior market forecasts then the local interest rate market will be forced to adjust their pricing on future interest rate reductions. All potential positive developments for the FX markets that point to a still higher NZD/USD exchange rate.
The announcement last week that the Reserve Bank of New Zealand is paying a substantially increased $510 million dividend to the Government from a profit of $624 million for the financial year to 30 June 2015 (a massive increase on the $56m profit in the previous year), highlighted and confirmed the fact that the RBNZ has been buying back the NZ dollars they sold on forex market intervention above 0.8500 in July/August 2014.
No Reserve Bank Board Director worth his or her salt would approve a cash dividend to be paid unless the profit was realised in cash. Data from the RBNZ’s statistics on foreign currency assets and liabilities confirms that NZ$520 million was sold in August 2014 for foreign currencies and that NZ$191 million was bought back in July 2015 and another NZ$81 million bought back in August 2015. Looks like the RBNZ have been active buyers of Kiwi dollar over recent weeks as well, partially explaining the repeated bounces back upwards from market rates below 0.6300.
“Ugly compromises” may be the order of the day for Trade Minister Tim Grosser and his team of negotiators at the Trans Pacific Partnership Agreement trade pow-wow in Atlanta, however the significance of this international trade deal to the NZ economy (and thus currency) should not be underestimated.
The free trade agreement with China has delivered enormous benefits and value to the NZ economy over recent years, albeit our dairy farmers have to deal with the increased volatility of prices received for their export product. Overall, export returns and prices have increased substantially from the Chinese FTA, even if it is just for the low value parts of the sheep’s carcass as our meat export industry is experiencing.
If a deal is consummated in Atlanta later today, the economic benefits to New Zealand are very material as we gain access to export markets that previous high tariffs locked us out of.
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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