The NZ dollar has had a number of falls lately. See the numbered chart further down the page.
(1) The Kiwi plunged 1 cent on Wednesday morning (17 April). This followed the release by Statistics NZ of the latest Consumer Price Inflation (CPI) numbers:
“…inflation eked out just a small gain in the March quarter, upping the ante for an interest rate cut next month.
The CPI rose 0.1 per cent in the March quarter bringing the annual rate of inflation to 1.5 per cent, down from 1.9 per cent in December, Stats NZ said.
The Kiwi dropped as low as US66.72c from US67.77c immediately before the release.
Economists had predicted the CPI rose 0.3 per cent in the three months ended March 31, for an annual increase of 1.7 per cent, according to the median estimate from a poll of economists by Bloomberg.”Source.
Wednesday’s sharp fall in the NZ Dollar came only a couple of weeks after a surprise Reserve Bank of New Zealand (RBNZ) about face on interest rate rises.
(2) At the end of March the RBNZ announced that an interest rate cut is likely to be the next move they make. This was a marked change from previous announcements where the NZ central bank had said the next move could be either up or down.
“Economists believe the Official Cash Rate could be cut as soon as May or August, following the Reserve Bank’s comments last week. The RBNZ shocked the market last week by stating the next OCR move is “likely to be down”, due to weak growth here and overseas.”Source.
This announcement also cut over 1 cent off the Kiwi dollar.
(3) Then in early April the Kiwi again dropped further on the back of worsening business confidence:
“The Institute of Economic Research’s quarterly survey of business opinion found a net 27 percent of firms expect economic conditions to deteriorate over the coming months compared with 18 percent in the last survey.”Source.
(4) In an interview on 12 April RBNZ governor Orr went further and kept the door open for a rate cut as soon as May:
“It is a really mixed picture, it’s just hard,” Orr said in an interview withSource.
Bloomberg in Wellington on Thursday. “I don’t know yet” whether there
will be a cut in May, he said.
Why Has the NZ Dollar Been Falling?
Each of the above recent falls in the New Zealand dollar have been due to some perceived negative news for the New Zealand economy:
- Low inflation – to central bankers this indicates they will need to stimulate the economy. i.e. lower interest rates.
- The reduced likelihood of interest rate rises – in fact the likelihood of cuts sooner than later means the N.Z. dollar is less attractive than other currencies to overseas investors. As they may find higher interest rates elsewhere.
- Worsening business sentiment – this also points to the likelihood of interest rates being cut.
Why Are Interest Rates Staying Low or Even Likely to be Cut? And Therefore Why Might the NZ Dollar Stay Low Too?
In August 2018 the RBNZ believed growth would slow in New Zealand throughout 2018. But then would get back above 3% in 2019 due to government spending and monetary stimulus. This was worse than what most of the bank economists were expecting. And also worse than the previous RBNZ monetary policy statement in May 2018. Below is the ASB and RBNZ forecast as of last August:
But the situation has deteriorated since last August. Instead of growth picking up after 2019, the bank and central bank forecasts are now for growth to fall. The RBNZ says down towards 2%.
However as you can see from the 2 charts above, in every monetary policy statement the forecast has been lower than the one previous.
Our guess is the RBNZ and bank economists will make further adjustments lower yet in the months to come.
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. Last year we reported that the New Zealand economy looks to have topped out and is slowing.
Reports this year are also backing this up:
“After some very strong years New Zealand’s job market has markedly weakened according to analysis of almost 62,000 vacancies listed on Trade Me Jobs for the quarter ending 31 March 2019.
Head of Trade Me Jobs Jeremy Wade said there had been signs for the past nine months that the extremely strong job market was weakening but the sudden decline in the first three months of 2019 had been a “surprise”. “New job listings were down 6.1 per cent year-on-year this quarter, that’s the first drop we’ve seen in the past 10 years.”Source.
Along with other recent headlines such as these:
- Beyond weak business confidence, there are concerning signs in the economy.
- NZ MARCH MANUFACTURING EXPANSION SLOWS TO LOWEST PACE SINCE LAST JULY
These economic numbers seem to indicate the New Zealand economy may have topped out and be slowing (possibly why the NZ dollar also topped out last year).
Refer to these reports from last year 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 have been sucking capital back to the USA. And so it hasn’t just been the Kiwi dollar getting weaker against the US dollar. Many other currencies have 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 last year 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.
Is the NZ Dollar Sideways Trend Broken – Where to Now for the Kiwi Dollar?
The New Zealand dollar spent most of 2018 falling, as news surrounding the NZ economy worsened. From high to low the dollar was down a hefty 13% in 2018. But it did bounce back in the last quarter.
In 2019 it has gone sideways trading between 0.6700 and 0.6950.
But the fall on April 17 dipped the Kiwi dollar down below the support line at 0.6700.
However we have not seen a definite close below that key horizontal support line yet.
The news that the Government had backed down on the proposed capital gains tax could give the New Zealand dollar a boost in the short term.
But we’d say the odds currently favour a lower dollar in the medium term.
If the 0.6700 line is broken then the next major zones of support are at the 0.66 and 0.64 levels. With some other support lines between these.
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.
Editors Note: This post was originally published 14 August 2018. Updated 18 April to include new reports that have impacted the NZ dollar. Along with updated charts.