An explanation of why the Kiwi dollar fell following a hike in interest rates


Summary of key points: –

  • Timely reality check on New Zealand’s economic outlook.
  • Beyond the US job title number.
  • Crikey! – We finally agree with Winston.
  • Business confidence would increase if we had a clear plan

Timely reality check on New Zealand economic outlook

The forex markets have a deserved reputation for delivering swift, revealing and often frightening verdicts in response to favorable and unfavorable economic news, events and developments.

Forex markets are very liquid, easily accessible, trade 24/7, and as relative prices continually incorporate future conditions and expectations into the current price.

By the time you read an article about an economic change in the newspapers (or online these days), the rapidly changing forex markets have already taken it fully into account. The competition of opinions of buyers and sellers of a particular currency on what future holdbacks are settled by instantaneous price discovery and movement.

Last week’s response from the New Zealand dollar forex market to the RBNZ OCR’s first interest rate hike since 2014 was not as most would have imagined.

Even if the 0.25% increase was widely anticipated, the vast majority would have expected the Kiwi dollar to appreciate in response. A slight depreciation from 0.6970 to a low of 0.6870 was the result, contrary to conventional wisdom for two main reasons: –

  • The classic old-fashioned forex reaction of “buy the rumor, sell the fact” seems to be well in play here. When the last few sentences of the RBNZ statement added some caution to the economic outlook, NZ dollar bulls looking for a rising kiwi were said to have been disappointed and they “rushed around” to become immediate sellers of NZD.
  • The long / fat tail of the Covid delta epidemic prolongs and expands the lockdown, which in turn damages New Zealand’s reputation for properly handling the pandemic and has negative economic consequences.

Currency markets by marking the New Zealand dollar lower signals that the performance of the New Zealand economy over the next 12 months is likely to be lower than its peers and competitors.

This foreign exchange verdict is at odds with Finance Minister Grant Robertson’s claim that our economy outperforms others.

Looking back, there may be some truth to Robertson’s claim (we did better last year than others). However, the forex markets are not looking too far back and the outlook for the future now looks much more difficult.

When your largest and economically dominant city is in tight lockdown for eight weeks, negative economic consequences are inevitable.

Previous GDP growth forecasts for the second half of 2021 and 2022 from RBNZ, Standard & Poor’s, NZIER, Infometrics and all bank economists are now all revised down as they realize that their forecasts previous ones were based on a short / hard lockdown and rapid recovery in economic activity.

They have all fallen into the trap that the New Zealand government has been caught in for a while, they have failed to apply the proper “risk” contingencies in their planning and outlook. The risk was that the Delta outbreak would be much more difficult to contain and the lockdowns would be prolonged, which is exactly what happened.

The irony that New Zealand is the last country in the world to abandon ‘Zero-Covid’ and the first economy to raise interest rates after the pandemic economic shock may tell you something about the timing. management of our government and the RBNZ! In fact, we weren’t the first to raise interest rates, Norway, Sri Lanka and South Korea all came before us.

In addition to the negative impact of the prolonged Auckland lockdown, reducing GDP growth, shortages of labor, shipping space and materials continue to hamper increased production in the productive economy. The complete lack of certainty for businesses, as the government continually fails to produce a forward plan for reopening the borders, is also hampering business investment at this time.

Question: What does a weaker than previous forecast for GDP growth mean for the New Zealand economy for the NZD / USD exchange rate?

Reply: As is always the case with FX analysis, there is more than one clear answer!

  • An expected 10% depreciation of the US dollar against major currencies in 2022 due to the US double deficit issue of A would suggest an increase in the NZD / USD exchange rate to 0.7600 (nothing to do with New Zealand).
  • Local economic factors such as the underperformance of GDP growth and the potential for falling prices of our raw materials will temper this dollar-induced increase in NZD.
  • The RBNZ, forced by weaker economic data to raise interest rates at a slower pace than most still expect, will also be a specific hurdle for the NZD and a changing forex market environment. Usually lower USD.

Beyond the US job title number

The overall U.S. employment increase for the month of September of just 194,000 (well below previous consensus forecast of +475,000) on the surface, would appear to delay plans to reduce the monetary stimulus from the Reserve federal and would therefore be negative for the US dollar. value.

However, it’s worth looking behind the headlines and delving into the detailed analysis: –

  • The big disappointment in the numbers of jobs was the surprising reduction in government employment. All other industrial sectors remained stable to strong. Basically, the strong seasonal rehiring of teachers in September did not happen this year as Delta concerns delayed the reopening of schools. It only appears to be a timing issue, the teachers will be rehired in October.
  • Wages rose sharply again in September, the average hourly wage increased 0.60%, bringing the annual increase to 4.50%. Labor shortages behind these significant increases.
  • The unemployment rate in the United States fell from 5.20% to 4.80% as the number of people actively seeking work declined.

The wage increases are further proof that inflation increases in the United States are much more permanent than transitory, so there will be no change in the Fed’s plan to start declining next month. For this reason, the US dollar has not weakened against the euro. The overall increase of 194,000 jobs is lower than expected.

The EUR / USD exchange rate hit our previous target rate of $ 1.1500 / $ 1.1600. We don’t think the USD has much more to do in its uptrend until it fully integrates lower and higher interest rates next year.

However, choosing when to reverse the trend for the US dollar is tricky, with the best guess being within the next three months.

Crikey! – We finally agree with Winston!

In the many years of this FX column, there has never been agreement with the views of veteran politician Winston Peters regarding the New Zealand economy and the value of the New Zealand dollar.

However, you should never say never. Now that he sits outside of government, Winston may have finally seen the light, as we totally agree with and endorse his comments reported last week: –

  • He is currently worried about the outlook for New Zealand’s economy – “how bad our economic situation is as a country”
  • “The right people we need in New Zealand are leaving, especially in IT”
  • “Raw material prices were good now, but they won’t always be.”
  • “Huge transport problems hampering the wealth-creating export sector.”
  • “Every week the government accumulates billions of dollars in additional debt.”

A voice of reason that the current government should stop and listen.

Business confidence would increase if we had a clear plan

Business confidence levels between -10 and +10 suggest that the NZD / USD exchange rate is reasonably valued at 0.6900. If the government had a plan to come out of the current mess with milestones and targets, business confidence would certainly improve.

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* Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has been commenting on the New Zealand dollar since 1981.

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