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Dylan Woods
5 years ago
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1 Offshore Overview Mission Statement To help Kiwi exporters make informed financial decisions by discussing foreign economies and the NZ dollar in a language they can understand. NZD Movements 1 United Kingdom 9 United States 5 Japan 9 Australia 7 China 11 Euro-zone 8 EXCHANGE RATES This Week 4 wks 3 months Yr 10 yr week ago ago ago ago average NZD/USD NZD/AUD NZD/JPY NZD/GBP NZD/EUR NZD/CNY USD/JPY USD/GBP USD/EUR USD/CNY AUD/USD To receive this publication each Thursday night me at tony.alexander@bnz.co.nz with Subscribe in the Subject line. NZD MOVEMENTS This week we have seen a bounce back up in the NZD against all currencies including the Aussie dollar which has soared against the greenback. The gains partly reflect profit-taking following the two cent fall over the previous week. But today the NZD jumped one cent after the Budget contained an easing of fiscal policy far greater than expected. We have ended this evening against the USD near 78.7 cents from 75.6 last week NEW ZEALAND DOLLAR vs USD NZD/USD EXCHANGE RATE Average = Does this mean we are in a new upward trend for the NZD? Not at all. We expect data releases in coming weeks will show worsening weakness in the NZ economy and this will pressure the NZD lower in two ways. Page 1

2 First, investor comparisons of our growth with growth in Australia in particular will highlight the shock correction happening in the domestic part of our economy. That will scare away some buyers in the same way talk about falling house prices has scared buyers away from the real estate market. Second, the weak data means an easing of monetary policy is closer in time. For the moment expectations of the timing and the speed of the easing have been shifted back following the loosening of fiscal policy in the Budget. But growth worries will resurface and as they do and easing expectations return the NZD will drift lower. It should be noted however that there is great uncertainty about the likely speed of the decline in light of good export commodity prices which traditionally support the NZD, plus persistent inflation worries which could cause a slower easing of monetary policy than we have pencilled into our forecasts. And everyone reading this must remember. You can t reasonably forecast exchange rates. This evening we have ended against the Australian dollar near 81.6 cents which is a slight gain from 81.2 cents last week. The AUD itself hit a new 25 year high against the USD lifted by a more hawkish than expected set of notes from the RBA s monthly Board meeting than expected, plus higher oil and gold prices NEW ZEALAND DOLLAR vs AUSTRALIAN DOLLAR NZD/AUD EXCHANGE RATE Average post-float = Against the British pound we have ended near 39.9 pence from 38.8, the Yen 81.1 from 79.9, and the Euro 49.9 cents from NZD vs BRITISH POUND NZD/GBP EXCHANGE RATE Average post float = NZD vs YEN EXCHANGE RATE 1 Rate rises mean stronger NZD NZD/JPY EXCHANGE RATE Page 2

3 NZD vs EURO NZD/EURO EXCHANGE RATE Trading Partner Growth Prospects On average New Zealand s top 14 export destinations are forecast to grow by 2.8% this year and 3% next year according to the monthly Consensus Economics survey of economists around the world. Last year growth was close to 3.7% so the trading environment facing our exporters including tourism operators has weakened and will remain well not so much weak as just below average. On average over the past ten years our trading partner growth has been 3.1% per annum. This year s only slightly below average result is mainly due to a slowdown in the United States from 2.2% growth last year and 3.4% over 2006 to 1.3% this year. An improvement to 1.9% growth is forecast for In our biggest trading partner, Australia, growth is picked at 3% this year from 3.9% last year with 3% also picked for In Japan growth of 1.3% is expected from 1.9% last year. An improvement to 1.6% growth is forecast for In Europe growth is picked to slow from 2.8% last year to 1.9% this year and 1.8% over The key thing to note from this month s Consensus survey is that the expectations for growth this year have almost stopped worsening. This reflects some better than expected data on the US economy recently, some good data out of Germany, and a pullback in worries about China also with strong data emerging. However strong worries persist about the global economy in light of the continuing though slightly easing credit crunch. For your guide this first graph shows monthly changes in growth expectations for our top 14 export destinations FORECAST G14 TRADING PARTNER GROWTH Average expectation each month of surveyed 2007 economists % year average 3 Source: Consensus Economics F M A M J J A S O N D 8 F M A M This second graph shows that when growth slows sharply overseas we usually get hit 1998 and The first version of this graph we posted here only went back as far as It showed a recession in New Zealand while trading partner growth was 2%. Looking at that one would conclude we can have a bad NZ economy while things are still okay offshore. But the graph we replaced it with goes back to 1986 and shows our recession followed a period of exceptionally weak growth not correlated with developments Page 3

4 offshore. This was the result of the 1987 sharemarket and property market crashes, continuing impact of the 1980s reforms, and the Reserve Bank fighting high inflation which averaged 10.5% between 1985 and TRADING PARTNER ECONOMIC GROWTH Sources: Consensus Economics, Statistics NZ Forecasts G14 trading partners -2 % annual average GDP growth The weakness we are seeing in the NZ economy this time around is mainly sourced from the domestic economy as householders pull back from a debt-driven spending spree on retail goods and housing, and businesses now struggle to adjust to a less ridiculously buoyant household sector. Long Term Currency Averages Of relevance to where the NZD goes over coming years is some concept of what the average level will be. Since the float in March 1985 the NZD/USD exchange rate has averaged 59 cents. Against the Aussie dollar the average has been 83 cents, the pound 35.6 pence and the Yen almost 74. In their annual report on New Zealand the IMF note in the intro (that s right one did not read the whole 34 pages) that...the equilibrium level of the currency is likely to remain above its historical average because a portion of the rise in commodities prices will likely be permanent. NZD vs.23 YEAR AVERAGES % USD NZ TWI GBP JPY AUD EURO This is what we and many others (including the Prime Minister) have noted over the past year. Our export commodity prices have increased 41% on average over the past 18 months and sit almost 60% above their ten year average. Our terms of trade (a measure of the size of the basket of imports you can buy with a basket of exports) has risen 9% over the past year to sit at a 24 year high. Page 4

5 NZ DOLLAR AND COMMODITY PRICES Trade weighted index RHS ANZ World Commodity Price Index LHS Index TERMS OF TRADE Source:Statistics NZ People overseas are hungry. They are getting richer and buying higher quality more protein-rich foods. There is an increasing number of them. We grow food very well. They want what we have. The outlook for our exports is the best it has been in decades. The challenge will be for non-dairy exporters to keep up with the dairy sector and other protein areas which will eventually join the dairy price surge. That is where a set of government policies focussed on improving the economic environment in which those exporters can grow becomes vital. THE WEEK S MAIN OFFSHORE EVENTS United States GDP +0.6%, CPI +3.9%, funds rate 2.0%, 9% of NZ visitors & 12% of exports, $10.5b FDI in NZ, 21% global GDP. NZ exports to US -7.3% year to, tourists -3.2%. There have been no ground-breaking data releases in the United States this week but downbeat comments about growth and worries about inflation in the Fed. s meeting minutes have caused concern overnight. The view remains that growth is weak now and downside risks still exist. But inflationary pressures are strong and once the economy and credit markets pull back from the brink attention will turn to how fast the Fed. can raise interest rates over That will undoubtedly mean a return of support for the USD which will accentuate downward pressure on high current account deficit and low growth economies like NZ especially with our interest rates expected to be falling over This summarised view we have been running is broadly what the Fed. expressed in the minutes of their most recent meeting which were released overnight and helped cause a sharp fall on the sharemarket. In uary the Fed. forecast growth between 1.3% and 2% this year but the expectation now is just 0.3% to 1.2%. The expected rise in the Fed. s key inflation measure has been lifted 1% to between 3.1% and 3.4% for the year and the minutes show the decision to cut the funds rate on April 30 to 2% was a close call. Consumer confidence measured in the monthly University of Michigan survey declined to its lowest level since 1980 in with a reading of 59.5 from 62.6 in April. The decline was something of a surprise in light of job loss reports not being as bad as expected and recent cuts in interest rates. However the housing market remains in very poor shape and consumers are undoubtedly reacting to rising food and in particular fuel prices % CONSUMER CONFIDENCE s US - HOUSING STARTS Source: University of Michigan/Reuters Seasonally adjusted annual rate Source: Census Bureau Page 5

6 Speaking of the housing market there actually was a slightly better than expected number released this week. Housing starts increased to a seasonally adjusted rate of 1,032,000 in April which was an 8.2% increase from March though still a horrid 30.5% decline from a year ago. It seems way too early to call the appearance of this swallow the start of Summer and the risk is the markets get a bit ahead of the true state of the US economy in the near future if not right now. Having said that, during the week a second number came in better than expected the monthly leading index. This rose 0.1% for the second month in a row which is the first such consecutive gain since late This signals that having declined from a peak in y last year the index implies a weak US recession rather than the feared deep outcome Inde US - LEADING INDEX % year ago change US - INDUSTRIAL PRODUCTION Seasonally adjusted annual 110 rate Source: Conference Board Source: Federal Reserve But returning to the negative stuff, industrial production fell by 0.7% seasonally adjusted in April which was a far greater decline than had been expected. The graph below now shows a far weaker picture than the one we included in our Euro-zone commentary last week noting no major divergence between US and Euro zone industrial production annual growth. Now there is with US production up just 0.2% in April from a year earlier. Some 80% of the industrial production index represents manufacturing and the conclusion one draws from this and other releases is that the manufacturing and housing sectors are in recession but exports and consumer spending are holding up for now. In the US the main risk to growth going forward is the credit crunch continuing if banks do not feel safe in boosting lending. To improve their willingness to lend investors will need to regain faith in US banks. At the same time the banks will need to boost their capital bases and that is what the Federal Reserve Chairman has recommended they concentrate on for the near future. During the 1990s Japanese banks failed to rapidly rebuild their capital bases which were decimated by poor lending over the 1980s and an inevitable correction in asset prices. This reluctance of Japanese banks to boost lending helps explain why the Japanese economy barely grew during the 1990s. The article referenced above notes that while banks and security firms have written off about $333b since last y they have raised just $244b of new capital one third from sovereign wealth funds. On the assumption that surely a whole bunch of economists must be able to get something right, there is hope for the US economy. A National Association of Business Economists poll of members shows a general belief that the worst is over for the US economy and credit markets and annualised economic growth will pick up to 2.1% in the second half of the year from 0.6% in the March quarter. Over the week the USD has generally weakened, hit by oil prices hitting a record level near $135 a barrel and some profit-taking following the USD s earlier gain as markets pulled back from the brink regarding US growth and the credit crunch. The greenback has ended this evening against the Japanese Yen near from last week. Against the British the USD has ended near $1.972 from $ Against the Euro it has ended near $1.577 from $1.54. Graphs in other sections below. Page 6

7 Want to find out about exporting to the US? Start here. Australia GDP +3.9%, CPI +4.2%, cash rate 7.25%, 39% of NZ visitors (but 16% spending) & 22% of exports, $47b FDI in NZ, 1.2% global GDP. NZ exports to Australia 20.2% (oil) year to, tourists 6.3%. As was the case for the United States so too for Australia this week we have seen no earth-shattering data releases or news events apart from a higher than expected inflation expectations survey this afternoon which has boosted inflation worries. The outlook remains one of good growth but high inflationary pressures hence the AUD hitting a new 24 year high against the greenback above 96.5 cents. Yesterday we learnt that with assistance from the tax cut package announced in the Budget two weeks ago consumer confidence measured in the monthly Westpac survey improved a tad. The index rose to 89.8 in from 87.1 in April which was a 15 year low. But as the graph shows the level of consumer sentiment is still really bad. AUSTRALIA - CONSUMER CONFIDENCE Index. 100 = neutral Source: Westpac Melbourne Institute Looking ahead though there is a chance confidence dips again on new worries about interest rates. Minutes from the Reserve Bank s Board meeting were more hawkish than expected with revelations that the possibility of another rate rise was discussed. Inflation risks remain strong in Australia as the economy faces a reasonable growth outlook underpinned by infrastructure and the minerals boom plus a shortage of dwellings and rising rents which will tend to limit the downturn in housing activity which the data clearly show is underway AUSTRALIA - 12 MONTH TOTAL DWELLING APPROVALS % Source: ABS Source: ABS AUSTRALIA - EMPLOYMENT GROWTH Annual % RHS The labour market remains strong and with the same upward pressure on inflation from rising food, raw materials and energy prices as every other country around the world inflation risks still do not lie on the downside. Our expectation is that the next change in monetary policy by the RBA will be an easing. But this is not expected until potentially well into 2009 with recent data showing underlying inflation hitting 4% for the first time on record. Monthly LHS Page 7

8 Before then the Aussie dollar will retain strong support from the high interest rate differential against other countries including an eventually shrinking advantage for the NZ dollar as our monetary policy is eased from later this year. The AUD will also continue to find support from strong commodities prices. Having said that we all remain uncertain about how much of the increase in commodity prices is attributable to purely speculative factors which could be producing bubbles for things like oil, gold, minerals etc. Should this element turn out to be large and the ending of such pressure produce significant commodity price declines then the AUD will face downward pressure. Barring that occurring in the near future it is likely we will continue to see the AUD now and then set a fresh high against the greenback as happened again this week near the 96.5 cent area. The AUD has ended this afternoon near that level at 96.5 cents from 93.1 cents last week AUD/USD EXCHANGE RATE 1.2 AUD/USD EXCHANGE RATE Want to find out about exporting to Australia? Start here. Euro-Zone GDP +2.4%, CPI +3.3%, cash rate 4%, EU ex-uk=9% NZ visitors & 14% exports, $11.2b FDI in NZ. EU 23% global GDP, Ezone 16%. NZ exports to EU -4.1% year to, tourists 2.7%. The week started out with news that the European economy grew far faster than expected over the March quarter with GDP rising 0.7% led by a 1.5% leap in the German economy. The growth helps explain why there is far less need for easier monetary policy in the Euro zone than in the US which experienced growth of just 0.1% over the March quarter % annual average growth EZONE ECONOMIC GROWTH Source : Quarterly change Source: IFO GERMAN BUSINESS SENTIMENT 100 = neutral 6 A J O 7 A J O 8 A Then last night we learnt that in spite of some slightly weak data in the past fortnight German business confidence measured in the closely watched monthly IFO survey improved to a reading of from in April. A fall to 102 had been expected. This result has bolstered expectations of the Euro zone economy being able to weather the economic storm coming out of the US and the credit markets and caused a lift in the Euro overnight. % Page 8

9 The Euro has ended against the greenback this evening near $1.588 from $1.54 last week USD vs. EURO EXCHANGE RATE 1 Rate rise means stronger Euro, weaker USD USD/EURO EXCHANGE RATE Want to find out about exporting to the EU? Start here. United Kingdom GDP +3.0%, CPI 3%, base rate 5.00%, 12% of NZ visitors & 5% of exports, $4b FDI in NZ, 3.3% global GDP. NZ exports to UK -7.5% year to, tourists -3.2%. It would be wrong to say that nothing of interest happened in the UK economy this week. But with the Budget this week and lots of other stuff on something had to be sacrificed and this section was it. For the record the outlook for UK growth remains worrying with a still very fragile housing sector and financial sector under siege from the credit crisis. The pound has nonetheless managed to end the week higher against a greenback depressed by worries about oil prices. Late this evening it was near $1.972 from $1.948 last week USD vs. POUND EXCHANGE RATE Rate rise means stronger pound, weaker USD GBP/USD EXCHANGE RATE Want to find out about exporting to the UK? Start here. Japan GDP +2.0%, CPI 0.7%, cash rate 0.5%, 5% of NZ visitors & 10% of exports, $1.8b FDI in NZ, 6.6% global GDP. NZ exports to Japan -7.9% year to, tourists -10.6%. Consumer confidence in Japan continues to deteriorate with the latest monthly survey by the Cabinet Office producing an index reading well below the 50 neutral level of 35.2 from 36.7 in March. As the graph amply shows this is the lowest reading since early 2003 and suggests weakness in household spending going forward. Page 9

10 55 JAPAN - CONSUMER CONFIDENCE JAPAN'S LEADING INDEX Source : Cabinet Office Source : Cabinet Office Some revised leading index numbers were also released this week showing the main leading index heading back down over ruary and March and signalling like many other indicators weak growth ahead but not necessarily recession. At least there was some good news today on the export front with receipts in April 4% ahead of a year earlier from 2.3% growth in March and expected growth of 2%. Export receipts from the US have been falling for eight months but receipts from other parts of the world including China (+14.1%) are improving. But as the graph just below shows, the trend for export receipts growth is still down % JAPAN - EXPORT GROWTH Slowdown -10 underway Source: Bank of Japan -15 The Bank of Japan undertook their regular review of monetary policy this week and unsurprisingly decided to leave the main cash rate unchanged at 0.5%. The central bank recently cut its growth expectations for the Japanese economy and following the review noted their concern about rapidly rising food and fuel costs slowing what has already been fairly lacklustre growth in consumer spending in recent years. They also indicated they had backed away from a general intention to raise borrowing costs going forward. Business profits are being eroded by rising energy and raw material prices so there are also concerns about business investment which has traditionally been a source of growth for the Japanese economy. Investment in plant, machinery and equipment was down over 7% in the ember quarter from a year earlier. All up, as with the other economies we cover this week, nothing emerged to alter the picture of a slowing economy with worries about spending being hit by food, raw materials, and fuel cost increases. Over the week the Japanese Yen has nonetheless managed to rise against a greenback affected by worrying retailer reports and record oil prices. But this is where explaining currency movements can be tricky. Japan is a major oil importer so one would also expect the Yen to be affected by high oil prices and in particular continuing increases in other imported materials prices and rising shipping costs related to the boom in Chinese iron ore imports. The Baltic Dry Index which measures the cost of shipping items in bulk by sea hit a record level this week. Page 10

11 12000 BALTIC DRY INDEX - SHIPPING COST MEASURE The Yen has ended this evening against the greenback near from last week USD vs YEN EXCHANGE RATE Rate rises mean stronger USD Mar 7- Apr 28- Apr USD/JPY EXCHANGE RATE Want to find out about exporting to Japan? Start here China GDP 11.9%, CPI +8.5%, 5% of visitors & 5% of exports, 11% global GDP. NZ exports to China +8.1% year to, tourists +8.5% In China news has clearly been dominated by last week s devastating earthquake. On the sharemarket prices have fallen amidst concern the damage to facilities will lead to production delays as affected factories remain closed or cannot get products in or out. As with the snow storms in ruary the earthquake has also renewed fears about special factors pushing up inflation so pressure remains strong for additional tightening of monetary policy though perhaps not in the immediate future given a recent tightening or reserve asset requirements and concern about the growth impact of the earthquake. Note however that once transportation systems are restored growth will receive a boost from the coming rebuilding programme to house 5 million affected people plus restore infrastructure and industrial facilities. The following article covers some of these points. As with the UK this section has been shortened this week because at 7.00pm on Thursday night one is well shagged out after two hours in front of TV cameras for the annual Budget-fest. The Yuan has ended against the USD back well below the 7.0 level near from last week. Page 11

12 USD vs. YUAN EXCHANGE RATE Rate rise means stronger USD weaker Yuan 1 USD/CNY EXCHANGE RATE Want to find out about exporting to China? Start here. The BNZ Offshore Overview is prepared by Tony Alexander, Chief Economist at the Bank of New Zealand. Ph This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. BNZ strongly recommends that readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither the Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication. Page 12

Australian Dollar Outlook

Tuesday, 31 March 015 Australian Dollar Outlook Still Under Pressure We have revised our AUD forecasts for this year down slightly to reflect developments over recent months. We now expect the AUD to end