By Roger J Kerr
The stabilisation and recovery back upwards in the NZ dollar value over recent weeks, which this column identified much more likely to occur than further depreciation to 0.6000 against the US dollar, appears to be solidly under way.
The NZD/USD rate has powered above the technical resistance point of 0.6500 and added another two cents to 0.6700. The Kiwi has also posted impressive gains against all currencies with the Trade Weighted Index moving up from the 69.00 area to 71.50.
The independent buying of the NZ dollar is well justified with the key driver, wholemilk powder prices (“WMP”), spectacularly reversing from US$1,500/MT to US$3,000/MT over the last six weeks. The speed and extent of the dairy price reversal has surprised everyone, however, it does confirm that the rapid fall to US$1,500/MT was based on low, off-season volumes and panic selling from various quarters. Some players are questioning how sustainable the price increases are, however current WMP futures offering prices for early 2016 delivery are now quoted at US$3,100 to US$3,500/MT.
The reality is that offshore players in the Kiwi dollar are buying it on the expectation that the RBNZ is now less likely to cut official interest rates again with the reasons for cutting interest rates in June/July (collapsing WMP prices) in the first place now no longer valid as WMP prices have recovered to much higher levels. The widely expected and significant negative impact on the NZ economy from two years of low milksolids payout to the dairy industry has largely dissipated. As the rest of the economy was humming along very nicely anyway, the doomsday merchants on the NZ economy have been exposed to be well wide of the mark with their views.
As expected, the Trans Pacific Partnership free-trade agreement has been another positive piece of news for the NZ economy and thus the NZ dollar over recent days. Whilst the major economic benefits are over the years ahead, improved access to the major export markets is fundamentally a massive win for the future performance of the NZ economy.
An examination of the forces and sentiment that pushed the NZ dollar down from 0.7200 to 0.6300 against the USD through the June to August period (and prompted all the local banks to promote forecasts of further Kiwi depreciation to below 0.6000) suggests that the various forms of fearmongering were completely overdone and the markets overreacted accordingly:-
- The collapse of dairy prices was a market flash in the pan and not reflective of actual global supply and demand.
- The RBNZ’s response to the lower diary prices and consequential economic downturn was to slash interest rates – a response that did not anticipate such an early and dramatic recovery in WMP prices.
- The sell-off in global equity markets on the basis of a Chinese economic hard-landing has come to a quick ending as it is realised that the Chinese situation is not as bad as first feared and the Chinese authorities have extensive fiscal and monetary firepower to prevent further slowing in their economy.
- Likewise, global commodity markets have stabilised and recovered somewhat as the panic and fear over the Chinese economy has proven to be an over-reaction. Therefore the Australian dollar has recovered from below 0.7000 against the USD to above 0.7300. A re-confirmation from the Reserve Bank of Australia last week that they remain firmly in “neutral” mode with interest rate settings caused buying back of the AUD from short position holders who were betting on further OCR cuts in Australia.
- The US dollar itself has weakened back against the major currencies as weaker than expected US employment figures in September have postponed the first Federal Reserve interest rate increase until December or even early 2016.
- Exaggerated fearmongering from local economists through the June to September period that the NZ economy was heading to recession and that continued OCR interest rate cuts would send the NZ dollar to below 0.6000 have so far been proven wildly inaccurate. It is a shame that business and consumer confidence in our economy were so heavily influenced downwards by these views.
In summary, the fundamentals of the NZ economy remain robust and the US dollar has been unable to strengthen any further on global FX markets, thus the NZD/NZD rate sits at 0.6700, not 0.6200. I would not expect further immediate gains to 0.7000 from here, however that medium term forecast of 0.7000 that PwC has had for several months appears achievable in 2016.
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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