By Phil Lynch
Conditions conspired against the kiwi last week, and the New Zealand dollar opens at its lowest point since March 2016 – a two and a half year low of 0.6569. This represents an 11.2% fall across 4 months since the April high of 0.7395.
The week ahead is stacked with data, but it is the recent Turkish and RBNZ developments that have kicked the kiwi lower. So today we take a closer look at these elements with a view to understanding where they might send the kiwi next.
The recent New Zealand dollar move has surprised many, but it is worth remembering that the New Zealand dollar has a long history of dramatic and unexpected movements. In other words, when dealing with the New Zealand dollar, you should expect moves like this to happen regularly.
Over the past 20 years, the annual trading range for the New Zealand dollar has been 13.5 cents, or 19%. So far in 2018 the range is just 8.9 cents, or 12.5%. So, we should expect the kiwi to continue to surprise us – and manage our business risk accordingly. In fact, the 13.5 cents/19% range is the average over the past 20 years – with many years exceeding that range. All that is needed for a bigger move is the right ingredients (Trump; Brexit; Fed’s rate hikes, etc).
A worthwhile quote (which we often pedal out in times like these), is from the ex-Federal Reserve Chair Alan Greenspan:
“despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin. I am aware that, of the thousands who try, some are quite successful. So are winners of coin-tossing contests.”
The RBNZ’s announcement on Thursday surprised markets as being more dovish than previously anticipated. The most quoted line from the RBNZ was that the next move in the OCR was equally balanced – up or down. So where does that leave markets, and what will the next move be?
On Friday I spoke with Bernard Hickey at the Christchurch CFO Symposium (with whom we partner with), and Bernard’s view was clear – that the RBNZ’s next move will be a cut. Not only will it be a cut, but it will be up to 100 points of cuts from the RBNZ based on the current assessment. There is no doubt that the RBNZ have changed their tune – but I believe the next move will still be a hike. In my view, it is just a case of lower for longer – much longer. There are unanswered questions here – is the RBNZ preparing markets with early signals of rate cuts? Or is the market overreacting?
One thing that has been reaffirmed by this move: markets are still sensitive to underlying interest rates set by the central banks. And the US Federal Reserve remains on course to take their rates far ahead of ours.
Another timely reminder to expect the unexpected has come from an unlikely source: Turkey. On Friday, the Turkish lira fell as much as 18% against the US dollar, as relations with the US hit a new low. President Trump escalated the feud by doubling tariffs on imports from Turkey – an important emerging market for Europe.
The impact on markets was immediate – with European and US stock markets hit hard. Banks across Europe were scrambling to assess their exposure to Turkey. The risk-off sentiment is again alive and well and this kicked the New Zealand dollar even lower.
It does feel a little ironic providing an opinion on the New Zealand dollar after just stating that forecasting the next move is as good as a coin toss. However, there are important considerations this week for the beleaguered New Zealand dollar which may impact your discretionary hedging decisions – so here goes:
My take is that the recent fall in the kiwi has now been well overdone and that the NZD is due for a correction higher. The last few months have seen the kiwi fall on the back of:
Out of the items listed above, the key element that has an actual impact on markets is the Fed’s rate rises, and these rate rises do warrant US dollar strength.
However, the remaining factors are harder to measure. The RBNZ has been neutral for years – and this neutrality is merely continuing into the foreseeable future. Low business confidence, whilst a concern, doesn’t necessarily reflect business output. Global trade wars haven’t yet involved New Zealand in a direct or significant way. And speculators on the kiwi will one day need to unwind their positions for profit.
Moreover, there are other factors supporting the kiwi. We are currently enjoying strong commodity prices. Our jobs market is near what the RBNZ calls full employment. And inflation is showing signs of strength (even if only deemed temporary).
It is these factors combined that make me think the next move for the kiwi will be higher – a snapback to the 0.68-0.70 cent range is on the cards.
Markets can remain irrational longer than some businesses can remain solvent. If you wish to review your current FX hedging position, then please contact us today. This week ahead will be all about the kiwi finding its feet again. After a steep fall this may not be easy and we can expect a rocky road.
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