English relaxed over high dollar

Published today in the press:

New Zealand's high dollar is a vote of confidence in the country's economy, and there is no silver bullet to bring it down for exporters, Finance Minister Bill English says.

The kiwi dollar was trading against the US yesterday at around 76c.

"The dollar is one way the market is telling us Australia and New Zealand have performing economies, because relatively speaking we are," Mr English told Canterbury business leaders yesterday.

Taking a five-year average, the New Zealand dollar was the highest it had been since the 1960s so concerns about the dollar did have some historical basis, Mr English said. "What can we do about this? In many respects not much. We've just got to make sure we've got the story clear."

Mr English said the dollar was high compared with the US and the British pound, but was not high relative to the Australian dollar and Australia was still New Zealand's biggest export market.

"One of the reasons that we are high against the UK and the US is because frankly they are in a bit of a mess."

New Zealand's economy had not shrunk by as much as Britain, US and Europe.
Another driver of the high dollar was low interest rates in other countries, Mr English said.

Interest rates in the US, Japan and the UK were either zero or low, so when investors were offered a triple A-rated New Zealand Government bond at 5.5 percent interest, it was attractive to them compared with the alternative.

New Zealand was now attracting interest from people who were wanting to diversify away from US dollars to buy New Zealand debt or the New Zealand dollar, he said.

Those things were out of the Government's control. "If there was a silver bullet to do with the dollar then we would fire it, but there is not one." The high New Zealand dollar was one of the reasons the export sector had shrunk in the last decade, he said.

New Zealand's economy had an imbalance between the tradeable and non-tradeable sectors. In the last five years the tradeable sector had shrunk by 10 percent and the non-tradeable sector had grown by 15 percent. The biggest driver of that growth was government spending. Growth in the future would not come from a fast-growing government or fast-growing credit, it had to come from the tradeable sector.

"It's (the tradeable sector) up on blocks and someone has taken the wheels."

Mr English also said countries all around the world were going to increase taxes but one country that would not was Australia, which was competing directly for New Zealand's companies and its people.

"We can not afford to raise taxes if they do not," he said.

Excellent article!

I will post later on today as to why, but we need more of this thinking!!

A game of two halves

Roger J Kerr, April 15th, 2009

In the clichéd rugby vernacular, it appears to be “a game of two halves” for the Kiwi dollar currency movements over the next 12 months. While having made impressive gains to 0.5900 from the low 0.5000’s over recent weeks there are a number of short-term forces and events that suggest the NZD/USD exchange rate will not sustain its gains and return to the low 0.5000’s.

However in the medium term to longer term (the latter part of 2009 and into 2010) against a back-drop of an improving New Zealand economy and potentially local interest rates increasing ahead in timing of other countries, the Kiwi has a far higher probability to be appreciating above 0.6000.

First Half: Bollard, English and Greenback restrict scoring opportunities

The short-term variables revolve around local interest rates/monetary policy, the USD exchange rate on global markets and the Government’s budget at the end of May.

RBNZ Governor resorted to some good old-fashioned “open mouth” monetary operations two weeks ago as he attempted to jawbone both interest rates and the NZ dollar downwards. His view was that the recent increases were inconsistent with his desirable monetary policy settings and that the economic recovery could be threatened if monetary conditions move away from the required “super-loose” position.

The verbal intervention only had a very brief impact on the NZD currency market. The Kiwi fell to 0.5600 from 0.5700 on the day, but has since returned to above 0.5800 as global investor sentiment improved and the NZD is finding some overseas investor favour.

The term swap interest rates were increasing due to one-sided fixed paying demand, as both household mortgage borrowers and large corporate borrowers rushed to secure fixed rates as they believed that the interest rate cycle has bottomed.

The RBNZ themselves caused this view about future interest rate direction by stating in their early March Monetary Policy Statement that “New Zealand’s capital markets must remain competitive”. The moneymarkets and borrowers took that to mean that our interest rates could not go too far below Australia’s as we need to still attract voluntary foreign capital inflows to fund the massive $16 billion current account deficit.

The RBNZ statements added to the volatility of interest rates and exchange rates in recent times, just at a time in the economic recession that businesses and industry sectors are crying out for stability and certainty.

The RBNZ now seem more likely to cut the OCR interest rates from 3.00% to 2.75% or 2.50% later this month. That action may cause some independent NZD selling, but the markets should have already priced this eventuality into the rate. Any RBNZ interest rate reductions in April and May will be the last. Term swap interest rates beyond three years are unlikely to fall on these last OCR adjustments downwards.

The second potential short-term negative factor for the NZD/USD rate is a stronger USD/weaker euro on global FX markets. The USD has already recovered from $1.3700 against the euro to $1.3100 as expectations mount that the European Central Bank will be forced to cut its official interest rates form the current 1.25% to zero over coming months. Lower interest rates in Europe and a closing of the differential to US interest rates should return the USD/EUR rate to $1.2500. The stronger USD should drive the kiwi to 0.5500 and below, but the NZD cross-rates to GBP, EUR, JPY and AUD are unlikely to fall - more likely to be stable to higher. The weaker euro has already lifted the NZD/EUR cross rate from 0.4000 to above 0.4400 in recent weeks.

The third factor that some believe will be negative for the Kiwi is the risk of NZ Government sovereign credit rating downgrade after the budget at the end of May. In the author’s opinion, Finance Minister Bill English will meet Standard & Poor’s expectations of controlling the size of the Government’s deficit and debt increases over coming years. It may take a suspension of annual payments to the NZ Superannuation Fund to make the numbers work, but the Government knows full well that it must avoid a credit rating downgrade at all costs. The NZ Government needs to compete against other Government debt issuers for investor support over coming years, maintaining our AAA rating is imperative to that strategy. Those currency market players short-selling the NZD going into the budget and expecting a rating downgrade will be disappointed.

The NZD/USD exchange rate is expected to hold above 0.5000 over coming months, but not trade above 0.6000.

Second Half: Forwards on top, backs find wide open spaces

Further out into late 2009/early 2010 the following factors suggest an appreciation in the NZD to above 0.6000:

• NZ economy coming out of recession on an export-led recovery in late 2009 – earlier than Australia and other countries,
  
• NZ interest rates rising later in the year, ahead of all other countries, the interest rate differential to the US moving upwards,
  
• Our commodity prices continuing to stabilise over coming months,
  
• Net migration inflows increasing as fewer Kiwis leave and more ex-pats return,
  
• The Balance of Payments current account deficit reducing over the next 12 months from 9% of GDP to 5% as profits of foreign owned companies here reduce substantially and the trade balance moves into surplus with weaker imports and stronger exports.

Excellent commentary from Roger Kerr, his thoughts are entirely in line with mine! - KT

NZD Trade

Could not resist!

Bought 1m NZD sold USD at 0.5515.

Will review at 0.5100 and 0.6100.

See earlier post as to why.

NZD/USD thoughts

The NZD/USD has fallen from the highs of 0.8216 on 27 Feb 2008 to lows of 0.5191 on 20 November 2008, a fall of over 30 cents, or 36.81%.

The average move from high to low (in a calendar year) over the last 17 years is 15%, with the greatest move being in 2001, of 26%. So the NZD/USD is clearly oversold, by any measure, even bearing in mind the turbulent offshore markets.

There are three main drivers of the NZD/USD:

Capital Markets
I was advised last week by a major bank that in their view some 40-50% of the normal foreign exchange volume is absent from the markets due to volatility and the lack of M&A activity. I believe that a good deal of the offshore investment present in New Zealand over recent years has departed our shores. Corporate offshore investors simply would not stand by and watch a fall of the above magnitude without hedging or withdrawing funds. The key barometer of this is the NZD/JPY, which has fallen nearly 40 cents from the highs of 88.10 to lows of 48.69 or 45% this year, a record move that surely means they have departed New Zealand for now.

Importers
The import community has been engulfed with a wave of global negative news, and lower forecasts from the various banking forecasts. Hence many have taken large amounts of NZD/USD cover, not dissimilar to the events seen a few years back when they covered some years ahead. The key time of the year for importers is right now, Christmas, with the bulk of payments for Christmas stock occurring in November and December. The import community is largely fully covered in the NZD/USD, and their selling of the NZD/USD will diminish as we move into year end and they go on holiday.

Exporters
The vast majority of exporters have low levels of cover. Manufacturing exporters have various levels of cover but all the agricultural and horticultural exporters have low levels of cover, firstly because their season has yet to begin, and secondly they are waiting for lower levels as indicated by the banking forecasts.

So with the capital market players absent, and the importers largely hedged, who of substance is left to sell the NZD/USD? If the rate starts to rise then importers will only be in a position to watch, and exporters will be scrambling to hedge export receipts, as we go into the thin markets in January. There may even be buyers attracted to our (still high) interest rates given that the rest of the world will be closer to zero, even if we have dropped another 1% next week.

Buy NZD/USD!!

The Budget......

....was boring.

But at least the markets have begun to reprice the lower interst rates that were being foolishly predicted.

When will people realise that lower growth does not equal lower interest rates?

Lower inflation equals lower interest rates, and we have all kinds of inflationary pressures looming due to higher oil prices.

Wait until Bollard confirms this in June. Then watch interest rates move back up and the NZD/USD retest 0.8000.

NZD/USD and NZD/JPY

Both these pairs look to trade higher yet.
So have added to long NZD/USD position at 0.7700 and added to long NZD/JPY position at 88.00.
NZD/USD should have a test of 0.8000 in the weeks ahead.
NZD/JPY should have a test of 91.00 in the weeks ahead.

Will review if 0.7400 NZD/USD and 84.00 NZD/JPY are broken on the downside.

NZD close to bottom, watch for the move back up again

I have been trading the NZD for over 30 years. I have never seen the NZD/USD move as far, as fast...ever!

Thank God it's Friday, but still getting offshore calls wondering when it is safe to buy again.

I posted here in July that I thought the NZD had topped out, and I repeat:

The NZ dollar has topped out at 0.8109, nearly 17% from the lows seen at 0.6715 in March 2007. Now looks to retrace and could pull back into the 0.7400 area before stabilising.

The reason?

Not our economy, Not the RBNZ actions, Not any Government moves.

Purely offshore pressures.

See story below: Volatility sweeps global markets.

That's the reason: the rise of global risk aversion; something the RBNZ has been praying would happen.Investors are pulling money home, worried about potential losses.

It could run some way yet, as the US property market disasters come home to roost.

That means, currencies that were weak, like the Yen and Swiss franc, will be stronger, as funds are repatriated.

Currencies that were strong, like the NZD, AUD and GBP, will be weaker, as funds are withdrawn.

That means the NZD will weaken.Might not go too far yet, but that is the trend, with the first target 0.7500.

What would stop this going too far are calm markets.8.25% return is hard to beat, and that means the NZD cannot stay down for long.

Equally the Japanese will not want a strong Yen, and may talk of intervention again.

But for now, and the next few weeks, the NZD is finally on the back foot.

Well it has certainly gone further than I thought it would.

But the short NZD position taken at 0.7950 will certainly pay a few bills, having just exited at 0.6750.

Best to stay out of the markets now, until things stabilise.

I think the NZD/USD is close to the base around 0.6600-0.6700 area.

The next trade will be buying NZD selling JPY, ie a carry trade (yes they still work really well!).

But looking for the entry point at present. With any luck the Bank of Japan will start to protest at the stronger Yen, and a base in the NZD/JPY will appear.

NZD has topped, retracement headed to 0.7400 area

The NZ dollar has topped out at 0.8109, nearly 17% from the lows seen at 0.6715 in March 2007. Now looks to retrace and could pull back into the 0.7400 area before stabilising.

The reason?

Not our economy, Not the RBNZ actions, Not any Government moves.

Purely offshore pressures.

See story below: Volatility sweeps global markets.

That's the reason: the rise of global risk aversion; something the RBNZ has been praying would happen.

Investors are pulling money home, worried about potential losses. It could run some way yet, as the US property market disasters come home to roost.

That means, currencies that were weak, like the Yen and Swiss franc, will be stronger, as funds are repatriated.

Currencies that were strong, like the NZD, AUD and GBP, will be weaker, as funds are withdrawn.

That means the NZD will weaken.

Might not go too far yet, but that is the trend, with the first target 0.7500.

What would stop this going too far are calm markets.

8.25% return is hard to beat, and that means the NZD cannot stay down for long. Equally the Japanese will not want a strong Yen, and may talk of intervention again.

But for now, and the next few weeks, the NZD is finally on the back foot.

NZD now over 0.7700

As expected, the NZD has moved over 0.7700, as posted previously in April.
Still looks to have the legs to test into the 0.7900/0.8000 area, but starting to look overdone there.

Some reasons:

NZ is a democracy.
NZ is AAA rated.
NZ does have sovereign fiscal surpluses.
NZ has no exchange control.
NZ has free and open borders.
NZ has an independent legal system.
NZ is benefiting from a commodity boom, especially in dairy prices.
NZ is well away from the trouble spots of the world.
The USD itself is weak.
Japanese and Swiss interest rates are low.

Oh, and New Zealand has the highest interest rates in the industrial world.

Certainly a factor, but not the only factor. If high interest rates created strong currencies, then latin american countries in the past would have had the strongest currencies in the world.

NZ exporters need to sell on value not on price. NZ exporters need to be the Prada of their industry. The currency should not be an issue. By arguing for a lower NZD all the time what they are really saying is "this is crap and the only reason you will buy it is because it is cheap".

NZ lamb and NZ products should be expensive on the world markets because they are the best.
There is no comparison between NZ lamb feeding on fresh grass and living in a clean, green environment, drinking pure water etc and what they call a herd in Europe feeding on meal pellets and god knows what.

Until we learn this lesson and stop selling on price certain exporters will always be bleating.

The recent debate in the UK had the Irish companing our lamb was too cheap! We should immediately put the price up so that we are the most expensive..because we are the best!!

Excellence attracts customers, just look at New Zealand wine.

New Zealand Dollar...0.7700 here we come?

The NZD/USD continues to press higher. The average change from high to low over the last 15 years has been 15%. That is, if you take the high in any one calendar year, then the low, work out the difference and average that over 15 years you get 15%. So that’s about 10 cents worth of change, historically.

The issue then becomes, is this year going to be a 0.7000-0.6000 band or a 0.6500-0.7500 band. Given that the low was just below 0.6700 in March 2007, and we are at 0.7360 now, then 0.7700 is possible this year, and it is just a normal year.

So those looking for a test of the post float high at 0.7467 in March of 2005 may yet get their wish.

Of course, all this is based on a weaker USD itself. This has been the case for a while now, as economists have fretted over the state of the US economy, and the arguments over whether US interest rates will go up further or come back again. I think the US will sit tight on their current interest rate settings. That means that unless the USD has a major shock, all time USD weakness this year should prove elusive.

Alan Bollard still looks reluctant to raise interest rates at best, and as long as our Finance Minister does not go and spend like a drunken sailor in the budget in May, Bollard may also, like the US, sit tight, and let the current settings do their work.

Don’t believe all the hype about the property market. Bollard focuses on that because it is a problem. And he gets a lot of press on that. But the bigger problem is government spending. For the first time in many years we have a finance minister with no debt constraints.

If you take Central Government, Local Government, Regional Councils, SOE’s (including power companies) they are probably over 50% of the economy. They are where the inflation is coming from….and raising interest rates does not affect them.

So the problem is, politicians need to spend to curry favour. Alan Bollard will be waiting to see what Cullen does. An expansionary budget means higher interest rates as monetary policy tries to lean against fiscal policy.

Then we will see a test of the post float high of 0.7467 and who knows, maybe a 0.7700 plus exchange rate.

A lovely present for hard done by exporters in Exporter year…. it’s in the governments hands now.