September 2017

New Zealand Update

The latest dairy auction saw prices increase by 0.3% with butter rising 3.8%. The prevailing view in the market is that both will move higher in the coming months. The wet start to the season has production below expectations which will underpin the broad price strength. Butter in particular is seen as being able to move significantly higher in response to demand.

Fonterra’s payout forecast for season 17/18 is $6.75/KgMS. The forecast dividend is 45-55 cents which makes for a total payout to Fonterra suppliers of$7.20-$7.30/KgMS.

New Zealand’s terms of trade rose 1.5% in the last quarter to a near record 44 year high. Export prices rose 2.4% and import prices rose 0.9%. The rise in export prices was largely due to meat and dairy prices. Imports saw an increase in machinery and electrical goods offset by a fall in petroleum products.

The NZ commodity price index fell further in August down 0.8% but up 16.3% on an annual basis. In NZD terms the index was up 0.2% and 15.8% year on year. Meat prices fell 3.2% month on month and dairy prices eased 0.4%

New Zealand Dollar/Interest Rates

New Zealand Dollar

NZD/USD is currently trading at .7250. NZDTWI is currently marked at 75.10. NZD/USD is 5% higher than 6 months ago. NZD/TWI is, on the other hand, essentially unchanged from 6months ago. The move in the NZD/USD is largely about USD weakness, the USD index down some 7% against the major currencies. Looking forward we expect that NZD/USD will be captive to USD moves. The US Federal Reserve continues to be reluctant to move rates higher because of signs of weak inflation and little move in employment costs in spite of tightening labour markets. That said, New Zealand’s relative economic performance and terms of trade will keep NZD/TWI at or around current levels in the short term. However, any sign of a peak in the domestic economic cycle, change of government (election 23rd September) and/or risk of events arising from geopolitical tensions will see the currency under pressure. Most models have the NZD at or around fair value on both short and long term basis. Risk is to the downside.

New Zealand Interest Rates

NZD cash rate is 1.75%. The NZ 10yr bond rate is 2.80%, from 3.35% in March 2017. While the RBNZ remain on hold for the foreseeable future, the feature of markets recently has been a flattening of the yield curve.   NZ 10 year bond yields have rallied over recent months as USD bond rates move lower in response to weak inflation, tepid labour markets, and heightened geopolitical tensions on the Korean Peninsular. The inability of Donald Trump to make any progress with his legislative change agenda has added to momentum in the unwind of the ‘Trump Trade’. It looks likely that NZD cash rates will remain unchanged at least until mid-2018, and NZD 10 year bond rates will trade a range 100/150 bps to cash in coming months.

Reading the Charts

The NZD has remained strong against all but the Euro in recent times. It is, however, starting to look poised to correct which coincides with the underlying fundamental picture.

US

Last updated 04/09/17, Source: Reserve Bank of New Zealand, Reuters, NZFMA

As in our last update, the NZ economy remains in good shape although the coming election has introduced uncertainty which is having an impact. The dairy price recovery is positive but is seemingly playing a limited role currently.

Euro

Last updated 04/09/17, Source: Reserve Bank of New Zealand, Reuters, NZFMA

As usual the global market will continue to influence the movement of the NZD with geopolitical concerns and the local elections dominating movements. The strength of commodity prices is supportive although to some extent appears discounted.

UK

Last updated 04/09/17,  Source: Reserve Bank of New Zealand, Reuters, NZFMA

In the next quarter the most likely move from a chart point of view is to the downside. Continuing downside against the Euro and developing, possibly accelerating against the USD.