Roger J Kerr says new RBNZ Governor, Adrian Orr may be at risk of playing the ‘dovish’ outlook-on-inflation-card a little too much, too soon in the current environment

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By Roger J Kerr*

It has been a tough week for the Kiwi dollar on global foreign exchange markets with the NZD/USD exchange rate falling below the previous support area at 0.6850.

The fact that our short-term interest rates are now below those of the US is not the only reason why the NZ dollar has fallen slightly out of favour at this time.

First on the list as to why the Kiwi dollar is less attractive for foreign investors and speculators is the unavoidable reality that the offshore players are not going to have confidence about the NZ economy (and thus currency) if all the local business firms display a total lack of confidence in their own economic outlook.

Yet another fall in in the monthly ANZ business confidence survey last week was enough to send the Kiwi dollar lower.

Business confidence reduced sharply when the new Labour Coalition government came into power last October and has just not recovered.

The main reason for the continuing pessimism from the business community is that the new Government has created numerous uncertainties for both large and small business firms, namely; employment/labour market policies, immigration policy, housing policy, taxation policy and foreign investment policy.

Add on assorted frustrations at “over-the-top” health and safety regulations and the average business owner/operator is not a happy camper these days.

Some economic commentators and several Government Ministers have dismissed the low level of business confidence as merely “perceptions” and not reflecting reality in the NZ economy today.

In the hard edge of the global FX markets “perceptions are reality” and anyone who thinks they know better than what the FX market is telling them, are generally blown away.

The NZ dollar FX market is telling us that the NZ economy is expected to grow at a much slower rate of around 2% instead of the 3% to 4% we have achieved in recent years.

The lower level of “firms’ own activity” index points to sub-2% GDP over the next 12 months and the historical correlation between this index as a lead indicator of GDP growth is a very strong one.

It is difficult to see business confidence improving until the Government stops talking about what it might do in various policy areas and actually get on with making the changes and ending the uncertainty of the unknown in the business communities’ combined eyes.

Unfortunately, the relationship and cooperation between the Government and the NZ business community is not helped by the Acting Prime Minister and several cabinet ministers attacking our largest company, Fonterra.

The Government’s criticism of Fonterra and its governance leadership displays a poor understanding of business risks and challenges that every multinational corporation faces in doing business in places like China. Many European, US and Australian companies have lost a lot more money in China than Fonterra over the last 20 years in attempting to establish market brands and supply chain/distribution networks.

There would not be too many countries in the world where the Government of the day lambasts the largest company in the largest industry that the economy is so dependent upon!

The building of economic powerhouses like Japan and Germany a few years back and China more recently were achieved by mutual respect and cooperation between political and business leadership.

Sadly, the tall poppy syndrome is well ingrained in many New Zealanders (including our current politicians) and it is often detrimental to our reputation and advancement.

When the Fifth Labour Government led by Helen Clark and Michael Cullen came to power in 1999 it was faced with a “winter of discontent” as industrial disputes railroaded business confidence and the Kiwi dollar downwards.

This column warned of industrial/strike action emerging in mid-2018 as a negative risk factor for the Kiwi dollar back in March.

Recent currency movements suggest that this risk has been elevated.

Let us hope that the trade union sabre rattling of threats does not materialise into widespread industrial action that disrupts the economy.

Back in 1999/2000 the Kiwi dollar did initially weaken on all the uncertainty. The economy, however, quickly recovered with rising house prices, rising inflation and rising interest rates sending the Kiwi back upwards in the years that followed.

Acting Prime Minister, Winston Peters has always favoured a lower currency value as positive for the economy through exporters earning larger profits (albeit only in the very short-term).

However, most understand that exporters purely selling on “price” due to favourable currency movements is not a smart move in the medium to longer term.

An artificially lower currency value in New Zealand has an immediate impact of higher inflation (as we import nearly everything) that hurts consumers, as well as ultimate export competitiveness.

The recent depreciation of the NZD/USD exchange rate below 0.6800 will certainly increase inflation later this year. And much sooner than that a combination of higher oil prices, lower currency and regional fuel taxes will be hitting transport, freight and related prices.

New RBNZ Governor, Adrian Orr may be at risk of playing the “dovish” outlook-on-inflation-card a little too much, too soon in the current environment.

The probability of an interest rate decrease being equal to a rate rise is a total nonsense in this writer’s view with current trends in fuel prices, wages and business cost indicators. Escalation of global trade wars and import tariffs emerging all over the place adds to the higher inflation risk.

Despite international investor sentiment turning to the “risk off” mode of late due to plunging Chinese share markets, weakening emerging market currencies/markets and unsettling trade wars, the US dollar has remained in the $1.15 to $1.20 trading range against the Euro (as was anticipated). In this environment of unlikely further USD strength, both the NZD and AUD should have room to recover back upwards from recent depreciation.

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*Roger J Kerr is an independent treasury Management advisor. He has written commentaries on the NZ Dollar since 1981. 

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