The NZ dollar plunged 1.5 cents on Thursday morning, after the RBNZ surprised many with the announcement that they “expect to keep the OCR at this level [1.75%] through 2019 and into 2020”.
This amounted to an increase of a further 12 months until the reserve bank expects to raise interest rates, and was not expected by market watchers.
So traders sold the New Zealand dollar on the expectation of higher yields elsewhere, such as the USA. This sent the dollar falling from around 0.675 down to 0.660.
RBNZ Governor Adrian Orr has also said a cut to the official cash rate is still an option.
The Kiwi dollar is now down over 11% since late January. This is a very big move for a currency in a matter of months. Particularly for a nation that is not in crisis, such as countries like Venezuela or Turkey currently are.
Why Are Interest Rates Staying Low and Therefore the NZ Dollar Too?
The RBNZ now believes growth will slow in New Zealand throughout 2018. But then to get back above 3% in 2019 due to government spending and monetary stimulus. This is worse than what most of the bank economists are expecting. And also worse than the previous RBNZ monetary policy statement in May.
Despite what the government would like us to think, it is not just business confidence that is down. The New Zealand economy certainly appears to be slowing. As reported last week:
New Zealand Economy Looks to Have Topped Out and is Slowing
Economic numbers coming in seem to indicate the New Zealand economy may have topped out (possibly why the NZ dollar also topped out last year).
Dairy Prices Look to be Weakening
ASB reports today:
“Dairy prices have shifted lower. Over the past 5 auctions overall dairy prices have fallen 9%, with whole milk powder prices down by a similar 8%. Notably, once strong butter prices have fallen hard, down around 17% over this period.
Initially, with global demand still firm, the fall looked like it could prove temporary. But this no longer appears the case.”
Troubles in New Zealand Construction Industry
There are troubles appearing in the New Zealand construction industry with problems with major players such as Ebbet, Hawkins and Fletchers. Money Morning NZ just commented on this issue.
Refer to these recent reports for more on why the NZ economy may have turned:
What Does the Weaker NZ Dollar Mean For New Zealanders?
A weaker New Zealand dollar is a mixed bag. It’s likely to be good for tourism, making New Zealand more affordable – well to Americans at least anyway. As rising interest rates and comparatively strong growth in the USA are sucking capital back to the USA and so it’s not just the Kiwi Dollar getting weaker against the US dollar. Many other currencies are too.
A weaker kiwi also will make New Zealand exports more attractive. So exporters may sell more goods.
But conversely, anything New Zealand imports will be more expensive. And we are back to importing more than we export with the balance of payments deficit recently widening to the worst in a decade. Fuel is likely to get more expensive and consumer goods will cost more. So overall a weaker NZ dollar is not great for the average man or woman in the street.
NZ Dollar Downtrend Broken – Where to Now for the Kiwi Dollar?
The NZ Dollar has been in a clear, but gentle, downtrend for over a year now. But Thursday’s sharp fall took the Kiwi below the downtrend line. So even lower prices are now to be expected. Perhaps not immediately as we are into oversold territory on the RSI. But the trend certainly looks to be down.
The next major zones of support are at the 0.64 and 0.62 levels. They look to be in danger of being reached before too long.
What to Do About a Weaker NZ Dollar?
If the New Zealand dollar weakens further, your everyday costs in New Zealand will likely rise. So what do you do to protect yourself?
Gold as a Hedge Against the Falling NZ Dollar
You could hold US dollars as a hedge against the NZ Dollar dropping. However as all currencies are being devalued in the long run (including the US dollar), buying precious metals like gold and silver can act as an excellent long term hedge against a falling New Zealand dollar.
The chart below clearly shows how buying gold in New Zealand since 2014 has made up for the falling New Zealand dollar.