A significantly weaker New Zealand dollar will make incoming tourism more attractive. Photo / NZ Herald
The combination of a strong US dollar, worries about China’s flagging economy and significantly weaker prices for New Zealand’s main exports has caused the Kiwi dollar to fall about US$4.5 cents in just over a month.
The currency was trading at 59.16 cents on Friday, down from $63.70 on July 14, and analysts think there’s a good chance more weakness is to come.
Kiwibank chief economist Jarrod Kerr, who in June forecast the currency could fall $55 by year-end, said data showed retail sales fell 1 percent in the June quarter, after declines in the March and December quarters. quarters The local economy slowed faster than expected.
Likewise, China’s mounting economic problems, fueled by a sharp downturn in the real estate sector, had people in turmoil.
And at the time of its US55c forecast, Kiwibank was not anticipating the sharp drop in milk prices that would follow.
Since June, Fonterra has lowered its price forecast for farm-gate milk from $8.00/kg earlier in the year to a median of $6.75 per kg of dry milk matter — which is below breakeven for many farmers.
The export prices for meat and logs have also fallen sharply.
“All of this is leading to a weaker Kiwi dollar and we believe that will continue. We still hold our forecast of $55c by the end of the year,” Kerr told the Herald.
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However, a lower currency can mitigate the economic impact of low export prices and give a boost to the tourism sector.
A weaker New Zealand dollar is helping exporters as their export earnings – settled in US dollars – are converted into more New Zealand dollars than would be the case during periods of Kiwi dollar strength.
Likewise, a weak kiwi gives New Zealand’s important tourism sector a boost as it makes the country a more attractive destination for visitors, which in turn can have a positive impact on the balance of payments and current account.
However, a weak currency makes imports more expensive.
“On the one hand, it helps our exporters at a time when these prices are falling,” Kerr said. “But it will also lead to inflation a little bit.”
Kerr said traders tended to view the New Zealand and Australian dollars as “proxies” for Asia and expressed the view that short positions in the Kiwi and Australian dollars would weaken Asia.
Fears over New Zealand’s trading conditions were another dark spot on the horizon for kiwi – largely due to sharply reduced demand for New Zealand’s key commodities from its largest market – China.
“We will see more stimulus from China, but the damage has already been done,” Kerr said.
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Added to this were steadily rising bond yields, here and around the world, at a time when central banks had abandoned attempts to support the market through quantitative easing or asset purchases – tactics that have been widely used during the Covid-19 pandemic.
A key driver of rising yields was the all-important US Treasury bond market, and comments from Federal Reserve Chair Jay Powell at the Fed’s economic conference in Jackson Hole, Wyoming last week showed where the US dollar and US bond yields would trend even higher.
Powell said at the conference, which was attended by Reserve Bank chief economist Paul Conway, that the Fed will consider another rate hike to curb inflation.
The Financial Times said traders at its September meeting still expected the Fed to hold rates steady at a 22-year high, but futures markets on Friday pushed back expectations for a key rate cut to June 2024 – a month later than expected earlier in the week.
The sell-off in US Treasuries that pushed long-term debt yields to a 16-year high earlier this week continued. In the bond market, yields rise when prices fall.
Aside from monetary policy, global bond markets have also had to deal with the sheer burden of global government debt.
Hamish Pepper, Fixed Income and Currency Strategist at Harbor Asset Management, said the local currency better reflects New Zealand’s economic situation and prospects than interest rate markets.
He said there was much more room for currency devaluation and the addition of a significantly lower kiwi would make inbound tourism more attractive.
New Zealand’s current account deficit was 8.5 percent of GDP in the year to March – a high figure by historical standards.
“The main reason the current account will recover is to say tourism revenue — which has lagged so far — will continue to recover,” Pepper said.
“That’s good. It has to happen.”
Yields have risen in interest rate markets, particularly at the longer end, partly due to increased supply.
The US Treasury Department has raised its estimate of the federal debt for the current quarter as it deals with a worsening fiscal deficit.
The Treasury Department increased its net borrowing estimate for the July-September quarter to $1 trillion, up from $733 billion it had forecast in May.
Domestically, the New Zealand government borrows between US$400 and US$500 million a week through the bond market.
Harbor’s Pepper said there was also an increased focus on New Zealand’s external vulnerabilities – specifically a current account deficit and higher public debt, which is leading to higher interest rates.
The local yield curve has been inverted for over a year – when short-term rates are higher than long-term rates – but the rise at the long end has meant that this is less the case. Inverted yield curves are taken as a sign of a recession.
In interest rate markets, New Zealand’s two-year swap rate – which can affect home mortgage rates – rose to 5.54% from 4.73% in February.
The yield on two-year bonds rose to 5.52 percent from 4.3 percent in March.
At the long end, 10-year bond yields rose to 4.98 percent from 4.61 percent in May.
Jamie Gray is an Auckland-based journalist covering the financial markets and primary sector. He joined the Herald in 2011.
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