By Roger J Kerr
In the historically normal context the NZ dollar exchange rate would have been slammed hard downwards resulting from the triple-whammy of negative news it has endured over the last week. The very volatile and telling forex market price action since these three announcements has ended up with the NZD/USD exchange rate close to 0.6500, which is near to the middle of the 0.6300 to 0.6800 trading range it has been in over the last seven months
The three pieces of normally bearish Kiwi dollar news were:-
- Fonterra lowered their 2016 season’s milksolids payout to dairy farmers from $4.60 to $4.15 following the slower than expected recovery in wholemilk powder prices over recent months. Two consecutive years of low prices for our largest industry is seen by some as negative for the overall economy as provincial incomes and spending are reduced.
- The inflation figure for the December quarter at -0.50% (i.e. deflation) was weaker than most expected with food and fuel prices falling and little upwards price pressures in the other areas. With the annual inflation rate reducing to +0.10%, there were immediate calls for the RBNZ to reduce the OCR interest rate further with the annual rate well below the 1.00% minimum under the RBNZ’s Policy Targets Agreement with the NZ Government.
- The RBNZ’s OCR review statement on 28 January was also something of a surprise package with the message a clear dovish one and forward guidance on monetary policy moved back to an “easing” bias. The actual annual inflation rate for 2015 coming in substantially lower than what the RBNZ expected means that they had to lower their forecast for inflation through 2016 and 2017.
What is instructive to future NZ dollar direction is that the Kiwi dollar (while temporarily sold down in the markets when each of these three announcement hit the newswires/screens) has come through the barrage in a remarkably resilient manner.
The lack of independent follow- through selling of the Kiwi dollar tells us that there is virtually no offshore speculative interest in the NZ dollar at this time. There are clearly no large “long Kiwi” position holders who would normally be forced to cut their losses or have their stop-loss sell orders triggered on such negative news.
Likewise, there appears to be no fresh speculative sellers looking for a lower NZD/USD rate to the 0.6200 area. An explanation for the low levels of international interest in the NZ dollar currently is that many hedge funds and macro funds are now very much in a defensive investment mode with the falls and volatility in global share markets over recent weeks. The NZ dollar and economic news from New Zealand is off their radar screens as they have greater challenges elsewhere.
The continuous currency forecasts from a number of local banks of the NZD/USD depreciating to below 0.6000 appear to have been unfulfilled yet again. These bank forecasters have been consistently predicting the demise of the Kiwi dollar to below 0.6000 since last July and since that time the exchange rate has remained between 0.6300 and 0.6800. Their reasons cited for the lower NZ dollar value were based around lower dairy commodity prices, lower NZ interest rates and a stronger US dollar on the world stage. We have only seen lower interest rates and still the NZ dollar does not depreciate as they expect.
Despite all the negative economic news discussed above and the forecasts for a lower NZ dollar, the reality of the current FX market situation is:-
- The NZ economy continues to outperform most other economies and the outlook for 2016 remains positive with annual GDP growth likely to be well above 3.00%. We remain an attractive destination compared to the money printing in Japan/Europe and problems with low commodity prices in Emerging Market currencies.
- The US dollar itself strengthened 12 months ago in expectation of US interest rate increase from the Federal Reserve in late 2015. The FX markets built-in the change in monetary policy a year in advance of it actually happening, therefore further USD gains have not occurred over recent months.
- While dairy prices are recovering from their 2015 falls at a slow pace, the outlook for 2016 remains positive with US supply to the globally traded market significantly reduced and the supply/demand imbalance slowly righting itself. Chinese demand for valued-added dairy products is reported as remaining robust.
The Kiwi dollar has weathered another storm without depreciating and seems destined to stay in the mid-0.6000’s for some time yet.
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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