To The Moon

(The story is written by Jonathan Mitchell on Fri, 23 Sep 2022 at https://www.nbr.co.nz/) 

The Kiwi dollar is expected to experience further downside pressures as investors retreat to safety, as the US Federal Reserve hikes interest rates, as well as fears of a global recession.

The New Zealand dollar touched a 2.5-year low against its US counterpart this week at 58c, after the Fed hiked again by an expected 75 basis points.

It also put the Kiwi under pressure with the Australian dollar, below 88c.

Tiger Brokers chief executive Greg Boland told NBR there was a further chance of the Fed raising rates by another 75bp in November.

He said the Kiwi was feeling the heat from aggressive monetary policies around the world, as well as weaker commodity prices. “Things like higher oil prices and freight costs have definitely affected the Kiwi.” 

Exporters feeling the benefits 

Boland said exporters were feeling the benefits of a lower dollar because many were being paid in US dollars. However, he said those same exporters were facing rising costs, including fertiliser and oil prices. Add to the mix rising wage inflation as well, he said. “It’s good news at the moment for exporters and bad news for importers.” 

Further downside risks 

Boland said there was likely to be further pressure on the Kiwi because of further rate hikes, as well as US inflation pressures. 

He said US inflation was only 1.4% at the beginning of last year, hitting 5.4% in mid-2021, before reaching 9.1% earlier this year and then 8.3% in August.“The stubborn inflation rate globally and in New Zealand, that’s going to be around for longer, so I think there could be further weakness in the Kiwi.” 

Devon Funds head of retail Greg Smith said the US dollar had been on an uphill climb for months, driven by ongoing hawkish comments from Fed officials.

He said the weaker NZD was not necessarily reflecting a lack of confidence in the New Zealand economy, and reiterated it was positive for exporters and the tourism sector. However, consumer and business confidence remained in the doldrums, with further pressure on household budgets because of rising interest rates and stubbornly high inflation.

UK recession 

Overnight, the Bank of England raised its base interest rate to 2.25% from 1.75%, lower than forecast. It marked the seventh consecutive rise and takes UK interest rates to a level last seen in 2008.  

The reason for confounding expectations was that the bank believes the UK economy is already in recession, with GDP forecast to contract by 0.1% in the third quarter, as opposed to growth of 0.4% previously forecast. 

That would follow a 0.1% decline in the second quarter. Inflation in the UK dipped slightly in August but, at 9.9% year-on-year, is still well above the bank’s 2% target. 

Core inflation – stripping out energy and food components, which are the biggest gainers – is at 6.3% on an annual basis. The BoE now expected inflation to peak at just under 11% in October, down from a previous forecast of 13%.

The bank’s decision comes against a backdrop of an increasingly weak British pound, the European energy crisis, and a set of economic policies from new Prime Minister Liz Truss.

OCR at 4.75%?

Back home, ANZ chief economist Sharon Zollner now expectedthe official cash rate to peak at 4.75%, up from a previous prediction of 4%. 

She expected two further 50bp hikes this year, with three 25bp hikes in February, April and May next year. 

“The economy is not rolling over, with the tight labour market and strong wage growth partially offsetting the impact of higher interest rates. The low NZD is also a meaningful offset to current monetary conditions.” 

Zollner said the RBNZ wanted to see slower growth – and a higher OCR would be needed to do the job.

“Monetary policy acts with long and variable lags, and there absolutely is a plausible scenario where a 4% OCR is all it will take to squeeze households enough to drive inflation lower.“Conversely, if wage inflation remains stronger for longer, the OCR may need to go higher than 4.75%.” She said ANZ’s updated OCR expectations better balanced the risks. 

(Jonathan MitchellFri, 23 Sep 2022)