We read a Bloomberg article yesterday looking at the Aussie and Kiwi dollars and the fact they have been the best performing major currencies against the US dollar in recent months. In fact it noted the returns on New Zealand’s securities surged to sixth in the second-quarter, up from 13th in the first three months of the year, amongst 26 sovereign debt markets tracked by Bloomberg.
We thought there was some interesting data contained in it, so here’s our summary and take on the data…
Obviously the NZ dollar rises if more money is moving into New Zealand and into New Zealand Bonds and the article certainly confirms this fact. “New Zealand’s fixed-income market has seen inflows more than three-times the weekly average over the past year in the week ended Aug. 3, Bank of New York Mellon client data show.”
“International demand for New Zealand’s debt pushed foreign holdings to 58 percent in June, from 56.5 percent in December, central bank data show.”
So there is plenty of money flowing into NZ of late. Where is it coming from?
It seems it’s the big money, with the likes of Kokusai’s Global Sovereign Open fund having started investing in New Zealand’s sovereign debt in February, “citing the nation’s high credit ratings and healthy economic outlook.”
Also the biggest bond investor in the world Bill Gross’s Pimco’s Global Investors funds increased holdings of New Zealand government bonds by 22 percent. (As we mentioend in last weeks feature article on derivatives, Bill Gross sold out of his massive stake of US treasuries in March of 2011 so we guess PIMCO is looking for where else to park the wad of cash? Interestingly even Gross has been talking up tangible assets like gold recently.)
Here’s 5 factors in why big money is being attracted to New Zealand and why the kiwi dollar has been rising:
1. “Everybody is looking for yield everywhere but you are looking for stable governments and good long-term prospects,” from Axel Merk, president and chief investment officer at Merk Investments LLC.
2. The New Zealand central bank is concentrating on containing inflation, keeping interest rates at least 2 percentage points higher than in the U.S. and the U.K.
3. The higher yield on NZ bonds is attracting investors seeking higher returns than they can get in the U.S. and safer assets than emerging markets.
4. Not so much driven by commodities lately. Usually the NZ dollar rises with rising commodity prices not so at the moment: “Prices for New Zealand’s commodities in world markets declined for six straight months through July, according to an ANZ National Bank Ltd. index. After adjusting for a stronger local currency, prices fell 3.4 percent from May and 16 percent from June last year.”
5. New Zealand is not as linked to Europe as other high yielding currencies. “About 21 percent of Brazil’s exports were destined for the European Union in June compared to 8 percent for New Zealand and 5 percent for Australia, data compiled by Bloomberg show. Forty-nine percent of Russia’s trade in June was with the EU.” So bond investors see New Zealand as a less risky destination for their money due to comparatively less reliance on Europe for exports.
What are the Downside Risks for the NZ dollar?
The Bloomberg report noted that the currencies of Australia and New Zealand may not be able to withstand a slowdown in China. “Imports grew 4.7 percent in July, compared to an estimated 7 percent gain forecast in a Bloomberg News survey. China is the destination for 28 percent of Australia’s exports and 14 percent for New Zealand’s.”
So obviously a slowdown in China (for which there is some data we’ve read recently supporting this currently occurring) will flow on to us here in New Zealand. And this hasn’t escaped the notice of major players…
“The real risk we’re worried about is the slowdown in China,” said Robert Farago, the London-based head of asset allocation at Schroders Private Banking, which manages about $25 billion. “One of the appeals is the yield but if the domestic economy is slowing, yields are more likely to come down than go up.”
As we noted last week the high dollar has not escaped the PM https://goldsurvivalguide.co.nz/writer-satyajit-das-on-how-new-zealand-will-fare-in-the-crisis/ and he did his best to talk it down. “New Zealand Prime Minister John Key, a former head of global foreign-exchange at Merrill Lynch & Co., warned against making “one-way bets” on gains in the kiwi in the Aug. 7 interview, saying that the nation’s policy makers have scope to cut interest rates.” So while the local bank economists talk of when the next rate rise will be, if the Fed and ECB engage in more money printing there is a chance of a further rate cuts here in NZ.
Interestingly futures traders seem to think the kiwi will keep rising at the moment with “Long bets for the kiwi [by futures traders having] surged 14,244 wagers to 17,808 contracts since the June low.” Whereas a Bloomberg News Survey says the kiwi will weaken to 79 cents per U.S. dollar.
But we need to see the wood for the trees. The talk of what the NZ dollar is doing with reference to the US dollar is largely irrelevant in the long run. The past decade has shown all paper currencies are going down, just some faster than others.
While this continues, gold (and silver) remain a must have in our opinion for anyone with cash in the bank.
For more on this topic see: The Strengthening NZ Dollar and How This Affects Gold Bought in NZ