The New Zealand dollar has had a challenging quarter; while not hitting quite the same lows as the Australian dollar the Kiwi lost an average of 6.5% against a basket of currencies.
Disappointing trade figures and an uncertain outlook
Like Australia, New Zealand is feeling the impact of the US-China trade war, particularly because China is the country’s largest trading partner. In the 12 months to August, exports fell while imports remained largely unchanged. The $1.6 billion deficit was slightly wider than analysts had predicted, bumping up the annual shortfall to $5.5 billion. Imports from China were up 11% in the 12 months to August and imports from Australia, NZ's second biggest trading partner, rose 5.2%. The changing picture within the global trade environment is presenting a challenge to the New Zealand economy and the balance of trade highlights the potential for further disruption and uncertainty if the US-China trade war doesn’t come to a positive conclusion after the October meeting.
There is an air of pessimism in New Zealand that is reflected across many parts of the world currently with so many uncertain factors at place. While consumer prices rose by 0.6% in the first quarter and were up 1.7% on the year, Q2 reports showed a slowing of growth in the Business NZ manufacturing purchasing managers’ index. As the challenging quarter drew to a close, the NZIER’s Quarterly Survey of Business Opinion showed that a net 35% of companies in New Zealand “expect a worsening in general economic conditions,” and confidence was at its weakest level since March 2009. As a result, the outlook is downbeat; NZIER research suggests that GDP growth with ease below 1% later this year and highlight the particular pressure on manufacturing due to changes and uncertainty in global trade.
Staying in step with Australia
While the two currencies aren’t linked, the New Zealand dollar often mirrors the performance of the Australian dollar. Analysts often assume that the countries have similar factors influencing their currencies because of geographic proximity. For example, when the RBA kept the cash rate unchanged over the summer, investors assumed that the Reserve Bank of New Zealand would be likely to follow the same approach.
RBNZ considers scope for fiscal and monetary stimulus
While the market expected the RBNZ to follow its Australian cousin, it took the lead in Q3, cutting the interest rate from 1.5% to 1% and the market perceived this as paving the way for the RBA to follow suit. After the cut was announced, the Kiwi fell against a basket of currencies although it held its ground against the Australian dollar. The cut was accompanied by a statement which caused some ripples in the market as RBNZ Governor Adrian Orr highlighted that "it's easily within the realms of possibility that we might have to use negative interest rates.” Later in the quarter, the RBNZ held rates and the kiwi made gains, but the statement still highlighted that there was “scope for more fiscal and monetary stimulus if necessary.” Investors inferred that despite the cautionary tone, no further cuts were imminent and the New Zealand dollar strengthened, gaining three and a half cents against sterling.
There is caution as the market considers the possibility that the RBNZ will at some point drop its avoidance of unconventional policy measures in light of the domestic and wider global economic picture. The challenge is that there is much uncertainty on the global stage and this could sway the Kiwi; for example developments in the Brexit process could aid or hinder the New Zealand dollar on sterling. The difficulty is that market remains uncertain as to which way the Brexit negotiations will go, and together with other factors such as the US-China trade war also unresolved, the New Zealand dollar may be in for a challenging time for the rest of the year. This may prompt the RBNZ to take further action which further influences the currency.
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