Ardern puts our export success at risk

Summary of key points:-

  • The probability of a “hard landing” of the American economy increases
  • PM’s foreign policy stance against China could hurt NZ economy (and dollar)

The probability of a “hard landing” of the American economy increases

Current FX market prices, holding the value of the US dollar at record highs in recent weeks, reflect the utter belief in FX markets that the Federal Reserve can beat high inflation without sending the US economy in recession, i.e. orchestrating a “soft landing” to the economic downturn.

Our view continues the consistent theme that currency markets trust the Fed too much to get it right. The markets are likely to be massively disappointed. Already, there is a pile of evidence that the US economy slowed sharply in May, and it looks like the rapid slowdown in activity levels across the US economy continued into June.

In addition to weaker-than-expected US retail sales, housing starts and industrial production data for May, the latest ISM manufacturing survey for June was also well below previous forecasts, an actual reading of 53, 0 against a forecast of 54.9 and 56.1 last month. The Federal Bank of Atlanta’s (GDPNow) GDP growth predictor predicts the US economy will contract 2.1% in the June quarter. Added to the 1.6% decline in GDP in the March quarter, it looks like the Fed’s Jerome Powell will once again be way off the mark when he says the US economy remains “robust” to handle rising rates. higher interest. Atlanta’s GDPNow index has been very accurate on actual GDP growth results over the years, so a “hard landing” looks increasingly likely.

Weaker economic data caused a sharp reversal in sentiment and direction in the US Treasuries market over the past two weeks, with 10-year yields falling to 2.88% from 3.50%. The bond market now anticipates a spike in US inflation and reflects a higher probability of an economic recession. It is only a very short matter of time before the forex markets reverse their bullish positions on the USD and sell it lower. The USD currency index closely tracks the yield of 10-year Treasury bonds. The sharply lower bond yields suggest that the USD index is about to reverse from the current 104.80 to a level closer to 100.00. A 5% depreciation in the USD over the next few weeks would see the Kiwi Dollar recover from the lows of 0.6200 to a value closer to 0.6500.

If lower bond yields translate into a lower US dollar, the EUR/USD exchange rate, which has remained under pressure around the $1.0400/$1.0500 mark, could begin to challenge the line. downside resistance and the 30-day moving average line at $1.0600 (see chart below). A rally in the Euro towards $1.0800 would pull the Kiwi Dollar up to 0.6500 and signal a turn towards a weaker Dollar going forward.

The Fed may need to change its rhetoric on the strength of the US economy, before currency markets are convinced that the US dollar is overvalued relative to the economic outlook. One upcoming economic data that could force Fed moderation is the June monthly jobs numbers on Friday July 8th. New jobs for the month could be well below the consensus forecast of +270,000, and also well below recent monthly increases. After the jobs data, the next key data point is the US CPI inflation figures for the month of June, Thursday July 14th. An annual rise in inflation below the 8.60% recorded for the 12 months to the end of May will be negative for the US dollar. Locally, the focus will be on the RBNZ interest rate review on July 13. No surprise there, with another 0.50% increase in OCR (which is already well integrated into the market).

PM’s foreign policy stance against China could hurt NZ economy (and dollar)

The post-Covid era of New Zealand’s economy in 2022 was expected to see a rebound in activity and confidence in the future. For a combination of reasons, the opposite is happening, with business and consumer confidence plunging to new lows and everyone pretty grumpy. Household finances are under pressure from high inflation and rising mortgage interest rates, and businesses are frustrated by labor shortages. In our view, New Zealand’s domestic economy may well slip into recession this year, but the export economy continues to do well and will once again pull the economy as a whole. How the economy was able to compensate for the loss of foreign exchange earnings from international tourism and international education in recent years remains a mystery. Higher commodity export prices compensated to some extent.

The loss of these foreign exchange earnings for tourism and education may partly explain why the Kiwi dollar has underperformed the Australian dollar in recent months against the US dollar. As a result, the NZD/AUD cross rate has fallen from 0.9700 last October to 0.9100 today. Lower sales volumes of foreign currency receipts, the purchase of New Zealand dollars resulted in a weaker performance of the NZD exchange rate.

There may also be a second reason for the lack of interest in buying the New Zealand dollar right now. A cursory scan of the headlines on the financial and investment news websites Bloomberg and CNBC over the past week reveals numerous stories featuring New Zealand and its veiled messages towards China. The Prime Minister’s recent visits to the United States and Europe have been marked by a sharp and unprecedented shift from our previous “independent and non-aligned” foreign policy stance. Without a mandate from anyone, Jacinda Ardern signed a partnership agreement with the United States for the Pacific and called on NATO and the United Kingdom to take greater interest in the Pacific against China’s ambitions in the region.

Why New Zealand would take such an aggressive foreign policy stance against our largest export/import trading partner (China) is beyond comprehension. It could just be that the Prime Minister likes to say all the right things at these international celebrations to get the photo ops with Biden, Boris, von der Leyen, Macron and Trudeau. Even the announced free trade agreement with the EU brings nothing but chicken feed benefits to the New Zealand economy. Looks like they gave us crumbs for kiwi fruit, seafood and wine to maintain their protectionist meat and dairy policies.

The implications for the Kiwi dollar are negative as foreign investors watch New Zealand go down an unexplained path of potential upheaval from the Chinese to the point where they ban some of our exported products, as they have with Australia. The Prime Minister still says it is the export sector that has carried New Zealand’s economy through the difficult times of Covid, but his recent foreign policy actions are jeopardizing that very sector. It does not mean anything !

In the interests of New Zealand’s social and economic well-being, the Prime Minister had better spend her time leading a trade mission to China (to repair relations), promoting New Zealand to the world as a place of immigration as we have a chronic labor shortage and spending a few weeks in South Auckland with community/charity organizations to understand the causes of child poverty that she has so publicly committed to To reduce.

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

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