Strategy and tactics NZD report 9 July 2018

Transcription

1 NZD/USD exchange rate NZD/USD exchange rate NZD/USD exchange rate NZD/USD 50 & 200 day moving rages Strategy and tactics NZD report 9 July 2018 NZD/USD forecast NZD/USD moving rages NZD/USD exchange rate forecast NZD/USD exchange rate and 50/200 day moving rages Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul NZD/USD range and CARR summary NZD/USD exchange rate drivers Current spot rate PwC forecast range CARR Low High index (rage) Next month (-0.3) Next three months Next twelve months (-0.3) (0) The CARR (Central Assumption Rate Reaction) represents the outcome of 12 factors (on a -3 to +3 scale) determining the strength of the expected exchange rate movement over the relevant time period. The width of the arrow in right column above highlights the degree of expected NZD/USD rate movement relative to todays spot rate. See full details on page 3. Upcoming key data releases Date (NZT) NZD/USD exchange rate Forward curve Forecast (avg for remaining quarter) Release Previous Consensus forecasts (Bloomberg) Impact on NZD 13/7 US CPI (June) 2.8%yoy 2.9%yoy NZ PMI (June) 54.5 Core view Source: Reuters US Federal Reserve added another 2018 interest rate increase to the dot-plot to four in total over 2018 and maintained three more in 2019, maintaining USD support, with European Central Bank on hold for longer. RBNZ neutral bias with timing for expected interest rate increases not until late 2019 / early New Zealand business confidence and real GDP growth outlook weakening, now largely priced-in. Widening cash differential in favour of US indicates NZD/USD expected to remain in lower range over coming months between and. Global financial market risk sentiment to remain on closer watch including emerging market concerns and global trade wars - difficult to predict but likely negative for most. US fiscal deficit concerns remain a medium term USD negative. Export commodity prices broadly NZD supportive. NZD hedging recommendations (generic) Exporter 0-12 month = Exporters should ensure hedging at maximums of policy from spot rates below month (non-filter test activated) = Exporters should ensure hedging at maximums of policy from spot rates below. 12+ months (filter test activated) = 3-year filter test activation requires spot of year filter test activation requires spot of Importer NZD/USD exchange rate 50-day moving rage 200-day moving rage 0-6 month payments = Top up requirements over coming months from spot rate > , otherwise use existing hedges. Clients should contact us for specific recommendations month payments = No further hedging at current market rates. Clients should maintain at least policy midpoints at spot rates of Page 1 Strategy and tactics NZD report 9 July 2018

2 NZD CARR index CARR index (Central Assumptions Rate Reaction) 12 key variables, indicators and trends that drive NZD/USD exchange rate movements. Strong depreciation Moderate depreciation Neutral Moderate appreciation Strong appreciation Date: 9 July 2018 NZD/USD spot rate: Relative variables Current position and outlook NZD impact (relative to todays spot rate) -3 to +3 1 mth 3 mths 12 mths 1 Monetary policy/inflation RBNZ interest rates increases delayed until later in 2019 and more likely early Small probability next move will be a cut (not our base case). New Zealand CPI at bottom of target band but headline CPI to pick up towards 2.0% over 2018 on petrol prices. NZ annual real GDP growth outlook softening to 2.0% - 2.5% over next one to two years (RBNZ and Treasury more upbeat). US Federal Reserve h indicated 4 interest rate increases in total over 2018, and 3 in NZD/USD to initially remain in current lower range as US cash rate moves above NZ and gap widens Government fiscal balances NZ surpluses maintained with restraint on new spending initiatives, however economic growth forecasts to derive tax revenue overly optimistic. US upcoming deficits approximately 5% of GDP in 2019 from current 3.5% requires weaker USD to fund External balances Trump trade protectionism risks to small open economies intensifying again with tit-for-tat trade war with China reescalating. US current account deficits expected to widen, with markets paying attention (negative for USD currency value). Tariffs ultimately not positive for US nor most other economies. 4 GDP growth performance Policy uncertainty still hindering NZ business confidence, firms own activity outlook and hence economic growth. Capacity constraints in construction, but export and tourism remain positive. US tax reform providing short-term boost to economic activity NZ specific commodity prices Dairy prices weaker (but outlook still firm) and other NZ specific export commodity prices appear to h peaked. NZD has weakened too far relative to commodity prices. 6 Australia, AUD and China Chinese economic data appears to be weakening again with China loosening policy to support but not wanting capital outflows. Concerns of tit-for-tat trade wars and potentially emerging market weaknesses has weighed on AUD value. Page 2 Strategy and tactics NZD report 9 July 2018

3 7 Global investor sentiment Nervousness in equity markets that global monetary policy becomes less loose (led by US) but earnings remain supportive. Initial round of US/China tariffs as expected but outlook difficult to predict. Global economic growth softening (from recent highs) but stabilising in June Property market Fundamental outlook for NZ housing activity and prices remains supportive, with supply still catching up and net immigration strong. RBNZ has applied modest loosening to macro-prudential policies (LVRs). Demand being constrained but so too capacity (and crowding out of private sector from new public sector building activity). 9 Political and economic risks Domestic political risks (and business uncertainty) remain. Concerns of unpredictable policy domestically and implications of labour regulations becoming more entrenched. Potential for greater uncertainty in US political environment ahead of mid-term elections (later in year) Lead indicators/ correlations 11 Technical indicators Dairy prices easing for now. New Zealand economic fundamentals moderating and losing appeal to international investors; weaker outlook largely already priced-in. USD more appropriately valued relative to economic performance, lead indicators and monetary policy outlook. Divergence between US and Europe (others) monetary policy outlook. NZD/USD exchange rate continues to trade below the 50- day moving rage now at but has moved back above FX market open positions CFTC futures contracts (non-commercial) net short at - 17,600 contracts. Next major movement expected buying the NZD back ahead of Northern Hemisphere summer holidays Average NZD impact PwC short term fair value NZD model = Page 3 Strategy and tactics NZD report 9 July 2018

4 NZD/USD exchange rate USD/CNY exchange rate The NZD has recovered from a two year low of USD earlier last week to currently be trading at The prior NZD weakness below had little to do with New Zealand (or US) developments, rather, was driven by China and Chinese Yuan (CNY) developments. Following the sharp USD appreciation / CNY depreciation to , the Peoples Bank of China began to engage verbal intervention for fear of seeing capital outflows in CNY on further currency weakness. The PBOC commented they would keep the CNY currency value at a reasonable and balanced level. The subsequent recovery and stabilisation in the CNY value has helped supported the NZD/USD back to and above. Exporters in USD should be at maximums of hedging policy in the 0-12 months time period and should maintain maximums of policy from spot rates of or below. Exporters who are able to enter hedging in the months time period (without filter test activation) should h had orders filled to (and/or slightly below) to be at or close to policy maximums. Clients should contact us for specific recommendations. Importers should continue to be well hedged over the next 0-6 months and use existing hedges; top up requirements over coming months from spot > if required. No further hedging in the 6-12 months time at current market rates; clients should maintain at least policy midpoints at spot rates of Contact us for specific recommendations NZD/USD exchange rate and USD/CNY exchange rate June 14: Trump approves tariff on $50b worth of Chinese goods NZD/USD exchange rate USD/CNY exchange rate US President Trump imposed the widely signalled 25% tariff on USD34bn worth of Chinese imports on 6 July, with tariffs on an additional USD16bn of goods to come into effect in two weeks. At this early stage, the confirmation has had little impact on global financial markets, with this initial exchange already expected and priced-in. Also as anticipated, China responded with tariffs on USD34bn of US agricultural products (e.g. soybeans and pork). China has also signalled a second round of tariffs on USD16bn coming into effect (mainly on energy and chemical products). Trump also pointed to plans for a further $200bn (10% tariff) and possibly another USD300bn after that. Following repeated threats by President Trump to increase tariffs on EU car imports, German car manufacturers h indicated their readiness to agree to zero tariffs with the US. However, it remains to be seen whether this will translate into an EU-wide stance. Global economic lead indicators outside of the US had been weakening in April and May, but h shown signs of improvement in June. For the US itself, the ISM manufacturing and non-manufacturing indices rose to 60.2 and 59.1 respectively in June. The German Manufacturing PMI (Purchasing Managers Index) eased to 55.9 in June, however the EU wide composite PMI increased to Chinese indicators remain weaker with the Caixin Manufacturing PMI (weighted towards small to medium sized private businesses) weakening to 51.0 in June from 51.1 previously. The Chinese economy is dealing with weaker domestic credit growth (impact of prior tightening) and uncertainties around external trade. Page 4 Strategy and tactics NZD report 9 July 2018

5 EUR/USD exchange rate NZD/USD exchange rate PMI PMI 65.0 Global Manufacturing PMI Indicators Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Germany US China Some expectation around greater comfort for European economic data and also commentary from the European Central Bank that the prospect of a September 2019 interest rate increase remains on the horizon (and not necessarily biased later) has helped support the EUR at USD1.1750; its strongest level for three and a half weeks. The NZD/USD exchange rate has also responded somewhat stronger off its lows in sympathy and association with this EUR/USD exchange rate and NZD/USD exchange rate Correlation 6 months: 93% Correlation 2 years: 26% Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 EUR/USD NZD/USD Domestically, the quarterly survey of business opinion from the NZ Institute of Economic Research corroborated recent ANZ business survey instalments with headline business confidence falling to -19 in Q2 (from -10 in Q1). Actual domestic trading activity in Q2 also softened to 7 from 15 in Q1. There was also a steeper fall in the Whole Milk Powder price within the GDT auction, in falling to USD2,905/mt - its lowest level for six months. We understand 20,000 tonnes were added to the auction (presumably in response to a strong Page 5 Strategy and tactics NZD report 9 July 2018

6 NZD/USD exchange rate NZD/USD 200 and 50 day moving rage finish to the 2017/18 season production). Despite the weaker price movement on this occasion, we would still caution on being too negative on prospect for prices at this point given the current off-season, and typical patterns of demand emerging in advance of the preferential tariff treatment on the first 150,000 tonnes into China each calendar year (to emerge in forward buying over coming months). $4,000 GlobalDairyTrade WMP and NZX futures price $4,000 WMP and NZX futures price (USD/MT) $3,500 $3,000 $2,500 $3,500 $3,000 $2,500 WMP and NZX futures price (USD/MT) $2,000 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 $2,000 WMP 3 month dairy future 6 month dairy future From a technical perspective, we note the NZD/USD exchange rate has bounced back above the previous support line at, albeit a to range appears in place (i.e. resistance at the 50 day moving rage). There has not been an update on CFTC speculative market positioning owing to the US 4 July Independence Day vacation. Given the NZD rebound over recent days and likely desire to square up positions ahead of the Northern Hemisphere Summer holiday period, profit taking on short-sold NZD positions appears to be occurring NZD/USD exchange rate with 50 and 200 day moving rages Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Source : Bloomberg NZD/USD exchange rate 200 day moving rage 50 day moving rage Page 6 Strategy and tactics NZD report 9 July 2018

7 US Govt. Surplus/(Deficit) USD Index We summarise recent developments in NZD/USD exchange rate drivers as follows:- New Zealand economic data and outlook has deteriorated as expected although by no means disastrous. Expectation of real GDP growth outlook in 2.0% to 2.5% range (incorporating fiscal stimulus) now appears largely priced-in. US economic data and outlook has improved as expected and the US Federal Reserve remains on track for quarterly interest rate increases, now largely priced-in. US/China/Europe/global trade wars are in the process of heating-up. Financial markets h not been spooked by opening anticipated salvos, although it is very difficult to predict the end game. Ultimately, a full-scale global trade war would be negative for most; the counterfactual being widespread benefit from open-trade. The US fiscal deficit is widening. This is currently -USD765 billion deficit for the 12 months to May 2018 and is expected to reach USD1 trillion in 2019 given Trump s tax reform and fiscal spending. This is ultimately USD negative (refer USD weakness for much of period of George W Bush fiscal deficits in chart - despite rising US interest rates mid-2004 to mid-2006). We estimate timing by early 2019 for the weaker USD trend to be re-established on this basis US Government Surplus/Deficit and USD Index Correlation: 63% US Govt. Surplus/ Deficit (Annual) bn USD index Page 7 Strategy and tactics NZD report 9 July 2018

8 NZD/USD exchange rate 7-year moving rage and filters NZD filter test NZD/USD exchange rate Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Exporter Importer Current spot rate year 3 year 5 year 2 year 3 year 5 year Filter criteria 15% below 15% below 20% below 15% above 15% above 20% above Filter activation level Activated? No No No No No No Necessary spot rate for activation NZD/USD exchange rate 7 Year Rolling Average +15% filter -15% filter Source: Bloomberg Page 8 Strategy and tactics NZD report 9 July 2018

9 Get in touch Stuart Henderson Partner T: M: E:stuart.r.henderson@nz.pwc.com Brett Johanson Partner T: M: E: brett.a.johanson@nz.pwc.com Chris Hedley Director T: M: E: chris.m.hedley@nz.pwc.com Alex Wondergem Director T: M: E:alex.j.wondergem@nz.pwc.com James Butler Treasury Advisor T: E: james.p.butler@nz.pwc.com James McHardy Consultant T: M: E: james.c.mchardy@nz.pwc.com Tom Lawson Associate Director T: M: E: tom.f.lawson@nz.pwc.com Tom North Treasury Advisor T: E: tom.o.north@nz.pwc.com Sarah Houston Eastergaard Manager T: E:sarah.j.houston.estergaaard@nz.pwc.com Matt Stewart Treasury Analyst T: E:matt.j.stewart@nz.pwc.com Ollie McDowell Treasury Advisor T: E:ollie.a.mcdowell@nz.pwc.com Georgia Bowers Treasury Analyst T: E:georgia.r.bowers@nz.pwc.com Rajeev Verma Treasury Analyst T: E: rajeev.c.verma@nz.pwc.com pwc.co.nz /corporate-treasury-advisory-services/ DISCLAIMER: This report is for PwC retained treasury clients and is subject to the individual agreed engagement letter and the following restrictions. This report should not be reproduced or supplied to any other party without first obtaining our (PwC New Zealand) written consent. We accept no responsibility for any reliance that may be placed on our report should it be used for any purpose other than that set out below and in any event we will accept no liability to any party other than you in respect of its contents. The purpose of the report is to document our current financial market views and generic hedging recommendations. The statements and opinions contained in this report are based on data obtained from the financial markets and are so contained in good faith and in the belief that such statements, opinions and data are not false or misleading. In preparing this report, we h relied upon information which we believe to be reliable and accurate. We reserve the right (but will be under no obligation) to review our assessment and if we consider it necessary, to revise our opinion in the light of any information existing at the date of this report which becomes known to us after that date. This report must be read in its entirety. Individual sections of this report could be misleading if considered in isolation from each other.