Summary of key points:-
- Currency risks for future exporters
- Three price charts that testify to our long-standing inflation problem
Currency risks for future exporters
Exporting companies from all industry sectors in New Zealand currently considering their business plans for the next few years should not be content with the financial risk posed by the appreciation of the New Zealand dollar against all currencies against at current levels.
Over the past few years there have been regular declines in the spot market rate of all currencies against the NZD to provide the opportunity to add and extend forward hedging. Going forward, there is a real risk that these setbacks will be both fewer and much shallower than has been the case in recent times.
The risk management rationale for exporters to maintain high levels of hedging in the current and future environment centers heavily on our cousins across Tasmania.
Based on superior economic growth performance in the post-Covid era, rapid increases in mining and metal commodity prices to record highs, and the inevitable shift in monetary policy stance from the Reserve Bank of Australia ( “RBA”) to raise interest rates this year, will all add up to potentially large gains in Australian dollars.
In the author’s view, there is a much higher risk of the Kiwi dollar following the Australian dollar higher than the counter risk of the New Zealand dollar depreciating on its own due to the economy New Zealand national who looks decidedly ill. The RBNZ and the New Zealand economy actually need a higher value of the New Zealand dollar to help mitigate the spiraling rate of inflation. The expected appreciation of the Australian dollar will provide solutions to the problem of high inflation, as the Kiwi dollar follows the AUD religiously.
The second risk to consider is the direction in which the US dollar itself will move over the next two years.
The US Dollar has appreciated 10% over the past 12 months, rising from 90.00 on the USD Currency Index to 99.10 currently. Prior to the Russian-Ukrainian war that pushed the USD higher in recent weeks, it appeared that USD gains were waning around 96 on the index.
This column has been of the view for some time that currency markets have already fully priced in the USD value of upcoming US interest rate increases by the Fed.
Meanwhile, the war has prevented currency speculators from unwinding their accumulated USD long position in anticipation of US interest rate hikes.
The latest US inflation data in February, at an annual rate of 7.9%, further fuels the view that the Federal Reserve needs to step up its monetary tightening and raise interest rates by 0.50 % next week.
However, given the high volatility in equity, bond and commodity markets over the past few weeks, it seems unlikely that the Fed will risk spooking the horses at this time with a more aggressive interest rate hike. interest.
The Fed is always careful not to cause a stock market crash that would reduce confidence and spending in the US economy.
In the short term, there could well be a downward correction in the value of the USD as the markets reflect some disappointment that the Fed did not rise by 0.50%.
In the medium term, provided the Russian-Ukrainian war ends relatively quickly, markets will focus on the Europeans who will be the next to end their monetary stimulus and begin to tighten policy.
Provided the uncertainty around Ukraine and European security abates over the next few months, the Euro is likely to recover in earnest from its current level of $1.0900 towards $1.2000.
The problem of the US economy’s double deficit will remain a major negative factor for the value of the US dollar over the next few years. To attract foreign capital/investment funds to fund its deficits, the US first needs a lower currency value, otherwise the funds won’t come in. A return of the USD currency index to 90 from 99 would have the NZD/USD rate well above 0.7200.
The balance of probabilities for local exporters is reasonably heavily weighted by a higher NZD/USD rate due to AUD appreciation and general USD depreciation over the next 12-24 months. Stable at higher cross rates against the euro, the yen and pound look much more likely than to decline. Aussie dollar exporters won’t yet be hedged at policy limit highs at 0.9330, but expected NZD underperformance against USD against AUD/USD rate moves should produce further rate cuts crossed at 0.9200 and 0.9100 over the coming months. Over the past seven years, NZD/AUD rates in this zone have been the time to push the hedge percentages to the max.
Three price charts that testify to our long-standing inflation problem
The ‘cost of living crisis’ debate among our politicians lately has arisen from the sharp rise in food and energy prices due to Covid, supply chain disruptions and shortages on the labor market. Add the excess monetary and fiscal stimulus to the economy in 2020 and 2021 and we have the perfect inflation storm.
However, as this article has consistently pointed out, we have a more fundamental and longstanding problem of inflation in the domestic economy that the authorities have failed to recognize and address.
The following three graphs are only small samples of the Housing and Household Services component which accounts for 28% of New Zealand’s CPI inflation index. There is something totally wrong with the supply/demand equation to house our population as local government rates, rents and property maintenance costs increase by approximately 4% every year without fail. The causes of this constant increase in prices can be traced back to government legislation/regulation and local government land zoning.
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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.