Surprising upside: New Zealand, FX and commodities

The New Zealand dollar declined rapidly as the COVID-19 crisis intensified. But there are reasons to think it – and many local commodity exports – may be approaching a positive trend.

DAVISON How have the past few weeks played out in the FX market?

ALLEN It has been an amazing couple of months for us. Going back to December, we had the US-China trade agreement and there was a lot of optimism in the region. Suddenly, the virus in Wuhan starts being talked about, it increases its ferocity and the region quickly replaces the optimism with pessimism. It has created unknowns about how this will affect trade flows from China and just how big the problem is going to become.

Australasian currencies, and the New Zealand dollar in particular, started drifting down to US$0.64 from US$0.66-0.67 just before the crisis really hit. This was an orderly decline, as everyone, particularly the US stock market, was ignoring the issue.

Then, suddenly, there were huge moves south in Australasian currencies when the global equities markets were hit. It resulted in a rebalancing effect as Australasian fund managers were forced to liquidate portfolios’ currency hedges.

We have seen massive outflows from our currency. At one point last week, the New Zealand dollar fell 8-9 per cent in 24 hours, down to a low of NZ$0.547. The US cut rates by 1 per cent and it had no effect on the currency because, as equities went down, the currency followed them down another 11-12 per cent. It is no longer a yield story – it is a survival story.

Funding for US dollars was much in demand and that was a problem for the euro and the yen but not so much for the New Zealand dollar because of collateral payments coming into the New Zealand banks.

The overall uncertainty revolves around how much damage has been done to portfolios and, therefore, how much currency rebalancing has to be done.

The other side is that exporters were probably over-hedged, and hedged at bad levels, and they did not know if their customers were going to be buying anymore. All these things caused a vacuum in the market.

Looking ahead, we have seen preliminary trade data, up to 18 March, suggesting New Zealand primary produce sectors are back in operation and are doing quite well. Forestry and fisheries are doing a little worse but beef and dairy are quite strong. Overall, our trade numbers are holding up well.

Once we get through this rebalancing, my view is that a lot of the pain in the currency move is probably done. QE is happening around the world but the US$2 trillion the US is printing is a massive number. After the global financial crisis, US QE helped drive the New Zealand dollar up as high as US$0.88. If we get things sorted out here, it is not obvious to me that the currency falls after this month.

ZOLLNER It is a good time to be selling food. In a global recession, selling necessities is a safe bet. I see the potential for food security being quite a pressure point this year. Governments around the world are going to prioritise it, and this will be to our advantage.

Our beef industry had shifted away from China to the US as a result of the coronavirus earlier this year but it looks like it will shift right back again. It is ironic: a month ago our huge exposure to China was a vulnerability and now suddenly it is a positive again.

These things can change really quickly, but our exporters seem to have a good breadth of customers and should be able to navigate the situation pretty well. We are reasonably upbeat on our commodities.

We expect some favourable current account outcomes with the savings rate going through the roof as people are stuck at home and have little to buy – this will cap imports.

However, I do not see much risk of the New Zealand economy being over-stimulated now. One can paint scenarios in which stagflation emerges down the track but I cannot see growth taking off. Our baseline scenario is that we go through degrees of lockdown until there is a vaccine. Economic activity will not be set free for a long time.

TONY ALLEN

Once we get through this rebalancing, my view is that a lot of the pain in the currency move is probably done. If we get things sorted out here, it is not obvious to me that the currency falls after this month.

TONY ALLEN ANZ