By Sheldon Slabbert.
The Kiwi dollar has recently received a lot of attention having moved about 10% in January alone. Currently, it is stabilising, however uncertainty always looms as a number of domestic and global factors can have a significant influence over the Kiwi dollar’s direction.
Global central banks are adding another level of uncertainty. Seventeen central banks cut interest rates during January and February. Ironically, their monetary policies are partly motivated by them trying to smooth out the business cycle. We are in an environment where countries are devaluing their currencies in an effort to create inflation and to achieve a competitive advantage for domestic exports. The so-called ”currency wars”. In New Zealand, the Reserve Bank has kept rates at current levels, and the economy is on a steady footing, but the unintended consequences of foreign central bank policies pose a concern.
The high volatility in markets has caught many businesses by surprise. Businesses need to be aware that there are a lot of factors outside of their control and it is vital to have an appropriate risk management plan in place. Recently, we saw the value of the Euro plunge against the Swiss franc, following the removal of the peg between the Franc and Euro. This had flow-on effects across most markets, not just in currencies. Denmark may be the next to be forced to drop their currency peg.
High volatility brings uncertainty and businesses need certainty to be able to plan and grow. In New Zealand, the current environment presents great opportunities; businesses that are proactive and aware of opportunities in the broader market are better able to apply their resources more effectively, improve returns and be competitive in a more global marketplace. Currently, low commodity prices and a relatively strong New Zealand Dollar presents an opportunity to buy raw materials or goods for future use before our Dollar devalues (as many analysts are forecasting) and rates of interest earned are dismal. Hedging currency risk and associated market risks for those sensitive to commodity prices is essential.
The sharp drop in oil prices is another example of the growing uncertainty in the markets. This presents business with its own set of risks and opportunities. Many have asked if the lower oil price is a positive or a negative for businesses. I imagine it depends on which sector you are in or invested in. Broadly speaking, consumers have more expendable income and depending on how they use this, it can provide a lift to the wider economy. However, one also has to keep in mind the huge amount of debt tied to the Shale Oil Industry - the job cuts, lower capital expenditures by energy companies and possible debt defaults which could have a huge impact on banks and bondholders. So we will have to wait and see what the real net effects are over the next six to 12 months.
Inflation, and how it will impact their business and the flow on effect it will have on consumer behaviour, is another aspect that businesses and investors should consider. Deflation is the term being mentioned by central banks as the number one enemy. However for the first time in history we have almost every central bank, globally, actively pursuing inflation. My concern is that they will at some point hit the mark but be unable to contain the amount of inflation created through their negative interest rate policies and trillions of dollars of stimulus.
Inflation is already showing up in emerging markets. In developed markets we have seen huge asset price inflation but inflation is also visible in other forms such as “shrinkflation” and “buyflation”. Shrinkflation is when a company sells the same product at the same price but give you less, for example, a 250g chocolate bar is now 220g. Buyflation, is the prices of nondiscretionary items (things we have to buy) going up, like school fees, groceries, insurance premiums, traffic fines etc. Inflation is on the way up, just not in the metrics used by most central banks. Businesses should look to perform a stress test of their operations at higher rates of inflation.
Parity with the AUD
AUD/NZD parity has recently come into the spotlight. Interest rates will be a big driver for the Kiwi. Should we remain at 3.5% for longer and Australia continue to cut, then we may well achieve parity. The overcapacity in China will be a drag on the Australian resource sector for some time longer. In New Zealand the recent dairy auction volumes fell to 23,000 tonnes from 28,000 tonnes at last auction. So it is no surprise that the prices were higher. Fonterra has maintained the payout to farmers at $4.70. Farm income may stabilise this year and they can likely sustain a short downturn after a few bumper seasons. Russian imports of our products are another wild card that may boost domestic performance.
The Kiwi dollar is on a better footing than our neighbours and we may reach parity. The Kiwi is likely to remain more resilient against our trading partners while we offer attractive yields in a low to negative interest rate environment. Should our yields no longer be as favourable I believe we can expect big shifts in the Kiwi. Businesses should always be conscious of the Kiwi’s movements in order to take advantage of opportunities or minimise the risk that could impact their business operations.
Sheldon Slabbert is the New Zealand sales trader at CMC Markets New Zealand and has over 15 years experience in financial markets.