Down but not out

Last week we expressed scepticism that threatened or actual currency intervention by the Reserve Bank would have a sustained impact, or that the NZ dollar was on the cusp of a sustained slide. After a week of currency gyrations, our view hasn’t changed.

To be sure, on last Monday the Kiwi fell by more than half a cent on confirmation that the Reserve Bank had sold $521m in August. While that had been widely rumoured at the time, perhaps markets needed evidence that that the Reserve Bank is willing to put its money where its mouth is. Based on previous intervention episodes – the last occurred in mid-2008, when the Reserve Bank cumulatively sold more than $1.5bn over several months – markets may also plausibly have inferred that the Reserve Bank might follow up with more.

More importantly, we then had more evidence that NZ’s export environment has weakened – another 10% drop in global whole milk powder prices on last week’s GlobalDairyTrade auction – and another lift in market sentiment around the US dollar following a strong US jobs print over the weekend.

In our view, those developments do offer some justification for the current weakness in the NZ dollar – particularly the latest drop in dairy prices, though oddly markets barely budged on the news. It’s difficult to identify a catalyst for the renewed fall in this week’s dairy auction prices, which comes after a period of calm over the previous couple of months.
The most obvious candidate is the deteriorating sentiment about China’s growth prospects, which seems to be weighing on both hard and soft commodity prices more broadly.