Piling on the pressure

The New Zealand dollar’s small post-election relief bounce last week was quickly swamped by far greater forces from both locally and overseas. The currency has now fallen below 80c against the US dollar for the first time in over a year.

Most major currencies have lost ground against the US dollar in recent weeks, which can be put down to at least two factors. One is that relative economic conditions appear to be turning more in the US’s favour, and consequently expectations for interest rate hikes by the Federal Reserve are being brought forward. Our forecast for a September 2015 start date for rate hikes is a little later than the market consensus, but we share the general sentiment that higher interest rates in the US are the most likely catalyst for a sustained rise in the US dollar.

Another factor has been a fading of investor risk appetite as questions are increasingly asked about the state of China’s economy. Chinese growth has remained slow (by its own standards) this year, and policymakers have resisted providing the broadbased stimulus that the market seems to be hoping for. Prices for commodities such as oil, gold, copper and iron ore have been sliding for several weeks, taking down the so-called commodity currencies such as the NZ and Australian dollars with them.

The Westpac-MNI consumer sentiment index for China, released last week, shows that households are a particularly weak spot in the Chinese economy at the moment – a crucial point for New Zealand, given that our exports to China are largely oriented towards consumption and homebuilding. House prices are falling in all of the major cities and the authorities continue to crack down on property speculation, and concerns about job security are growing. Our view remains that some fiscal stimulus will be forthcoming, though with a selective focus.