It's that time of the year again – the excitement of the Ashes is palpable. There are a lot of cricket fans in my office and, although I can’t count myself as one of them, a crash course has taught me that the Antipodean teams often win. Indeed, Sunday marked a crushing defeat for England in what the media are calling a “bloodbath.”
But in the currency markets, the tables are turned. Sterling seems to have hit a six, thanks to Mark Carney’s warnings about a rate hike “moving closer.” Meanwhile, the Australian dollar, weighed down by commodity price weakness, is languishing at six-year lows and the New Zealand dollar is out for the golden duck, having fallen some 17 per cent against the US dollar in 2015.
At the start of 2014, economists at HSBC called New Zealand’s economy the “rock star“ of that year. It was expected to outperform most other G10 countries as a result of construction spending, a booming housing market and -- perhaps most importantly -- rising dairy prices supported by strong demand from China. New Zealand is the world’s biggest dairy exporter.
Even if you are no economist, you will have heard that once-insatiable Chinese demand has since slowed. Dairy prices have gone bad. The price of skimmed milk powder has slumped by almost 50 per cent over the last 12 months, according to Global Dairy Trade. While the Reserve Bank of New Zealand was the first G10 central bank to hike rates after the crisis, it has now reversed course.
In June, it slashed rates for the first time since 2011 in response to the drastic fall in dairy prices. The market is now pricing in another cut as early as this Thursday, as well as in August. “Given the weak rate of underlying inflation and steep falls in dairy prices, we recently shifted our profile to include easing at every meeting up to and including October,” economists at RBC wrote in a note last week. Analysts as Barclays see a continued weakening of the Kiwi dollar as one of their top trends for the third quarter.
Not everyone is as pessimistic. Analysts at SocGen believe “soft fundamentals and rate cuts are already discounted,” and “the market is likely to unwind its shorts after the probable cut at this week’s meeting.”
OK, so the New Zealand dollar and the Australian dollar may not score a century this year, but aren’t we (except for SocGen) a little too gloomy here?
Demand for commodities from China is weakening, but the country’s government is throwing all of its available stimulus at the economy. There is no hard landing in sight. Plus, we have known for two years now that the Fed will tighten monetary policy. No surprise here. The world economy is growing, and excessive currency moves usually invite a bounce back. The hope for New Zealand, its economy and currency is that it will do the same.
City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.