This time last year, the NZD sat at approximately 88c to the US dollar. It now sits at 65c. Maybe thought of as too hard to understand and simply easier not thought about, just how does the weakening NZD affect the average everyday Kiwi?
We asked Westpac Senior Economist Felix Delbruck and Senior Market Strategist Imre Speizer about what some of the flow on effects might be with a weaker dollar.
“The average consumer will see imports becoming more expensive,” Felix says. “Petrol prices are back above $2 a litre, and obviously buying direct from offshore or going on an overseas holiday has become more expensive. Prices of other imported goods and services, from TVs to cars, will also go up as time goes on.”
“Prices in stores typically take longer to change. It takes time for new stock to come in, and importers and retailers may decide to vary their margins to maintain market share.”He says the basic idea is that a lower NZD makes prices set in foreign currency more expensive in NZD terms.
For New Zealand dairy farmers, Felix says a lower NZD means the pay-out won't be as low as it could have been.
“Essentially, lower dairy prices mean that as a dairy exporting nation we are getting less for what we sell on world markets, so we’re also able to purchase less. The exchange rate just decides who wears the pain. A lower NZD will cushion dairy farmers' incomes and make other exporters better off, but it will also make imports more expensive.”
So what’s behind this all?
Senior Market Strategist Imre Speizer says the main driver of the Kiwi exchange rate falling is that the US central bank is likely to push up interest rates from late this year onwards.
“The NZD/USD exchange rate has got 2 legs to it. Things can happen to the Kiwi leg and things can happen to the US leg.
“Currently the US economy is doing better and in a position where it can start pushing up interest rates soon, which is going to push up the US dollar relative to many other currencies.”
Alternatively, the New Zealand economy is starting to slow.
“It’s still healthy, but slowing,” Imre says. “It’s most noticeable in the dairy sector, but confidence in other parts of the economy is slowing as well, and all of that combines to force the Reserve Bank to cut interest rates.
“We think it will continue to cut rates until the OCR gets to 2.0%, which would be a record low. Lower interest rates, all else equal, will weaken a currency.”
Expectations of US hiking and the Kiwi economy slowing have already caused a sharp fall in the NZD/USD exchange rate, and Imre says these expectations are unlikely to wane.
“In fact they’re going to persist for at least the rest of this year. So for the rest of this year we can say that we think that the Kiwi exchange rate is going to weaken further. We’ve put a target on it by year end of 60c which is 5c from where we are right now.”
This is down around 27% from this time last year where the NZD sat at around 88cents to the USD.
“You can see the start of the decline quite clearly,” Imre says. “The big turnaround occurred in July last year. This 27% loss is quite significant.”
He says it’s almost impossible to pinpoint the equilibrium level of where the two currencies usually sit.
“Since we floated, we’ve roughly averaged 63c nominally against the US. So you could say that coincidentally where we’re targeting by year end is close to the long-run average.”
The recent Chinese stock market shock
Imre says if you want to take a third angle to the weakening NZD, you could cite the Chinese stock market’s plunge as well as the Greek debt crisis with the possibility yet that Greece may exit the Euro zone.
“Both of those things create a climate of risk aversion such that money flows away from risky investments into safe havens,” he says. “New Zealand is not a safe haven so offshore money would tend to flow out of the New Zealand dollar and into safer currencies like the Yen, Swiss Franc, and the US dollar.”
He says the Chinese stock market drop is a negative shock to risk appetite and the Kiwi dollar is closely related to risk appetite.
“If risk appetite goes up, the Kiwi dollar goes up, and vice versa. In this case, the Chinese stock market shock is negative which has depressed risk appetite.”
How long will this last and where to from here?
Imre says what often happens after a very sharp market move is that the market speculators are positioned overwhelmingly one way or the other.
“In this case they are overwhelmingly short the Kiwi dollar, i.e. have been net sellers.”
The Senior Market Strategist says when everyone’s positioned the same way, all it takes is a few mild surprises in the opposite direction and it starts causing people to run for the door.
“This is when you get a very sharp pull back the other way.
“I think if we do get down to those low 60s, then the chance of a decent rebound becomes high.”