Kiwi to fly on National election win?

flyingkiwi

by Chris Becker

Over the weekend, NZ Prime Minister  John Key’s incumbent National party won the general election in a clear majority. The effects of a third term for the conservative (ish) party on the South Pacific nation are being felt and discussed already, with the consensus rising that budgetary and social welfare reforms will continue and probably expand into other areas in a pro-business, conservative sense.

From a worldview, that is – according to the multi-trillion dollar FX market – this stability in government and policy are likely to underpin the direction of the inflated Kiwi, the NZD.

The NZD has had a significant pullback from circa 88 cents to 81 cents against the USD in recent weeks, which has given the largely agricultural economy a small reprieve, but there is likely to be a small rally on short covering and some minor USD weakness following the election.

The post-GFC technical chart for NZDUSD shows significant resistance at 88 cents, with a stable trendline from its lows that should be watched closely, but is likely to become strong support around 78 to 80 cents:

NZD MONTHLY

What is making the NZD so strong is its relatively high interest rates which has risen 1% from January this year to currently 3.5% – a huge return compared to the sub 1% rates available in the rest of the world, and much better than the paltry 2.5% available here in Australia – a rate likely to go down than up given the weakening economy.

Not only is this affecting the AUDNZD cross, but against Euro, Yen and Pound Sterling – all elevated due to the simple rate differential:

eurnzd nzdjpy AUDNZD

This strength is causing a loss of confidence in the heart of New Zealand’s export-based economy – its agriculture – with farming sentiment falling even post-election as more than a third of farmers expect the rural economy to get worse (only 20% expect improvement) with nearly half expecting their own business to get worse.

It does suck having a stronger currency if you’re a commodity price taker. Luckily (sic) thanks to Key’s victory, similar to John Howards in the early part of last decade, this endorsement is likely to put a floor under the NZ housing bubble and thus solidify the NZD as a “safe harbor” currency in a world of ZIRP or even NIRP.

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Comments

  1. NZ is about to be smashed economically – and PM Key and all his liberal claims will be seen as complete fiction, which they are… NZ is in exactly the same boat as Australia (aka China led) and although they will recover more easily than Oz, they too will have to readjust expectations.

    • Except their China led is dairy and last I heard the Chinese weren’t building milk silos, they were building residential real estate…

      • It all comes down to “Disposable income” – if they don’t have any, they won’t buy (relatively) expensive milk products from NZ…

        Where New Zealand differs from Australia is that agricultural products will inevitably have a return as things slowly pick themselves up of the floor and China gets back to what it does best – although at a much lower level, meaning that soft commodity prices will be a lot lower. A few tough years ahead as demand evaporates though.

        Australia is in a very different, and arguably a far more difficult position. Its lost a large section of its manufacturing base – which is in worse shape than official statistics indicate, simply because it contains a lot of one-off fabrication and associated construction for the mining and LNG industries. Unwarranted in my opinion because they are project specific as opposed to market niche oriented.

        Furthermore, even when agriculture does make a return, Australia’s agricultural industry is a substantial smaller slice of national GDP than NZ’s. To be honest I am a bit worried what will happen over the next there or four years, I cannot see how we can escape a serious recession (depression for various bits of the country)…

      • I welcome it Research , hubris will pay its debts because sooner or later the universe stops accepting the collateral …

      • In May 2014 – 19% of New Zealand’s exports were to China – granted thats not the 36% Australia has. But its still very sizeable. And given many of NZ’s other markets such as Japan and Australia are also highly reliant on China’s economic growth too – trust me, they are in the same sort of boat we are…

      • They also happen to be one of the lowest cost producers of an essential commodity. Also they did not go into mega expansion mode at the cost of everything else. They will not flourish, but our boat is sinking much faster.

  2. It will be interesting to see what happens to exports when China’s realestate bubble starts to really crash, couple that with a dollar as you said that is going to go higher and I would say there is going to be pain ahead for exporters.

    Pity about the NZ property market not been able to crash though. We have unrestricted foreign investment in NZ property as far as I know, similar to what you have FIRB 🙂

    • They could help soften (sic) the housing market further (since their MP tools are a bit late and not on target fully) by introducing a CGT for property.
      My favoured method is a sliding scale over time – 90% for the first 5 years, 50% thereafter. (i.e if you “make” $100K on sale within five years, $90K is taxed….)

  3. I would not call NZ economy export based. Its economic strength is purely derived from ongoing housing bubble

  4. I was just in Auckland and around the trendiest retail district in the CBD (High Street), approx 60% of retail outlets in the Chancery were empty. The price of almost everything is high with car parking priced at $6 an hour. In nearby Ponsonby, the streets were dead and the trend eateries empty. Downtrodden expressions on people’s faces are evident. The rock star is a bit of an enigma.

      • That’s what I encountered for enclosed parking. Is that cheap?

        In Brisbane, you’ll pay $4.50/hr for a metered street park in the CBD.

        Undercover multi-level parking will be more in the ballpark of $15-20/hr (albeit with probably a whole-day fee of something like $50 if you’re in before 8:30).

  5. I am very impressed with Researchtimes perspective on NZ.

    The NZ Government has a massive job ahead of it … speeding up the essential reforms required.

    Mr Key will be held to account in due course for failing to get on to these out of the 2008 election … as promised.

    there is much nonsense being talked about Mr Key in the media at the moment. he’s lapping up the fleeting glory !

  6. “It does suck having a stronger currency if you’re a commodity price taker. Luckily (sic) thanks to Key’s victory, similar to John Howards in the early part of last decade, this endorsement is likely to put a floor under the NZ housing bubble and thus solidify the NZD as a “safe harbor” currency in a world of ZIRP or even NIRP.”

    Hahaha . This site is just gold sometimes. Rolled 24 carat gold !