Kiwi dollar poised to defy deteriorating New Zealand economic outlook

Summary of key points:-

  • Strong AUD buying so far – more to come
  • NZD/AUD Cross Rate Falls to 12-Month Low
  • New Zealand’s economic outlook is deteriorating – the government is not helping!

Strong AUD buying so far – more to come

The Kiwi Dollar has lost some of its previous strong bullish momentum over the past week. After hitting a high of 0.6990 on March 31, the NZD/USD exchange rate fell to 0.6925.

It seems that the speculative buying of the Kiwi Dollar, which has dominated the local FX market and pushed the rate up sharply since the lows of 0.6550 at the end of January, has lost some steam (for now! ).

It is quite understandable that this could be profit taking (i.e. selling NZD) by market participants following a four cent appreciation in the New Zealand unit over the course of of the last two months. March 31 quarter-end and year-end window dressings by firms and fund managers may also have contributed to the buying of kiwi dollars which took the rate to nearly 0.7000 le March, 31st.

Local fund managers with USD-denominated offshore equity portfolios need to protect their clients’ investment returns against the widely expected and general depreciation of the USD currency over the next 12 months. Some investment managers may not have kept their NZD/USD hedge ratios at high enough levels (hence buying NZD on March 31 as they increased hedge amounts).

While the Kiwi Dollar may have failed in its first attempt to trade above 0.7000 since late November, the outlook remains positive, due to the forces driving the NZD/USD exchange rate.

High commodity prices, rising interest rates, an impressive Australian economy/Australian dollar and a weaker US dollar (more likely the end of the war in Ukraine) remain dominant factors pointing to further gains in the NZD well above 0.7000 over the next few months.

The AUD held on to its gains of the past few weeks at 0.7500 to the dollar. Continued AUD buying is to be expected in the near term as currency speculators (US and Asian hedge funds) who previously held very large short positions in the AUD have so far only settled only half of their speculative bets. CFTC/COT futures data as of March 27 shows that speculative positions sold short in AUD fell from 100,000 futures contracts ($10 billion) in early March to 50,000 contracts last week.

The constant expectation from this column over the last few months has been that these speculators would eventually be forced to unwind their positions and they needed to buy the AUD to do so. The exact timing of this change has never been certain, but it appears to have finally arrived.

There are still AUD bettors holding 50,000 contracts open, shorting the AUD expecting the AUD to weaken from here. However, the AUD is moving in the opposite direction to the USD, so it’s only a matter of time before these remaining speculators are also ‘stopped’ to prevent them from taking even bigger losses as the market escalates. AUD appreciates.

The Reserve Bank of Australia (“RBA”) will conduct a further review of its monetary policy and interest rates on Tuesday, April 5. The stalemate between the financial markets and the RBA could last a few more rounds, but it looks like the markets are winning the battles with the gains in the AUD FX market and Australia’s interest rate markets setting plenty of rises from higher. ‘August.

Any hint in the wording of the RBA’s statement that they are backing away from their indefensible “inflation is not a problem” stance as of today should send the AUD higher. Australia’s Foreign Trade figures for the month of February on Thursday April 7th will be another reminder of the real strength of this part of the Australian economy. It will be another month of a huge trade surplus (exports > imports) of over A$10 billion.

NZD/AUD Cross Rate Falls to 12-Month Low

The NZD/USD cross rate traded last week at a 12-month low at 0.9190 as the AUD continued to outperform the NZD against the USD. Local exporters to Australia who had the courage and patience to refrain from forward hedging AUD receipts when the NZD/AUD rate was well above 0.9300 for most of the year last, now have the option to lock below 0.9200 (after forward deduction points) hedged exchange rate.

The pattern of NZD/USD trading ranges over the past nine years (see chart below) has been that lows in the 0.9000-0.9200 area are reliable hedging entry areas for exporters in AUD.

Some may question the rationale for the depreciation of the New Zealand dollar against its Australian counterpart at a time when the RBNZ is raising interest rates aggressively to fight inflation, while the RBA remains in mode denial and refuses to report interest rate increases.

It’s a good lesson in how currency markets price the future ahead, today. New Zealand currency markets priced in 2022 rising NZ interest rates in September/October 2021, pushing the NZD/AUD cross rate to 0.9700 at that time as the kiwi outperformed the dollar Australian.

Today, Australian currency markets are pricing in inevitable Australian interest rate hikes later this year and betting that the RBA will be forced to change its monetary policy. For these reasons, the AUD outperforms the NZD and drives down the NZD/AUD cross rate.

The decline in the NZD/AUD cross rate may also have some influence on Australian investors/companies currently making the decision to buy New Zealand businesses. The cheaper Kiwi dollar would have helped Ampol buy Z Energy’s new infrastructure fund and First Sentier, Igneo would have bought Waste Management for NZD 2 billion.

New Zealand’s economic outlook is deteriorating – the government is not helping!

It is becoming increasingly clear that a major limiting factor on the expected appreciation of the New Zealand dollar against a weaker US dollar in global currency markets over the next 12 months will be the lack of confidence in our current government to pursue economic policies that reduce inflation and stimulate investment. /growth.

The appallingly low levels of business confidence surveys already send the message that the business community is not convinced that general economic conditions will improve anytime soon. The upcoming quarterly NZIER Business Opinion Survey will confirm the discouragement, with the confidence index likely to fall further into negative territory from -28% in Q4 2021.

Unfortunately, Labor Cabinet Ministers have no understanding of the current direction of the economy and its ultimate dependence on investment/business expansion.

As an example of their naïveté, the MP and her entourage were out in force to celebrate the opening of the new Transmission Gully highway in Wellington last week.

The PPP project that was worryingly over budget and over the delivery date is hardly something to celebrate for the government partner! Their selection of an Australian private sector consortium leader who had a questionable track record in the first place raises serious questions about competence.

A recent example of how to get along and get things done (for this writer anyway) was the city of Barcelona’s winning bid to win the 2024 America’s Cup. authorities/investment groups in their city and region to successfully promote their city is something New Zealanders could learn from. In contrast, our fate in central and local government continues to bicker and squabble over petty/parochial plots of territory and always seems to lack faith in private business ventures.

The lack of confidence in the current government’s economic management will be on full display in the May budget as Grant Robertson makes the RBNZ’s job even harder to control inflation by continuing its fiscal spending spree. Add a ‘reset’ immigration policy designed to limit the number of immigrants coming in precisely when we have severe labor shortages across all industries and a brain drain to Australia, makes Australia realize. how disconnected from the real world they are.

A weaker New Zealand economy for a whole host of reasons in 2022, however, will only temper the expected gains in the New Zealand Dollar due to a weaker AUD/USD currency market environment.

NZD/AUD 2014 to 2022

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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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