By Steven Knight, Market Strategist for Blackwell Global
The New Zealand economy faces a significant shock in the form of a continual rout in the global dairy trade (GDT) index. Today’s GDT result of -10.7%, is a significant blow to an industry that provides over 30% of New Zealand’s exports. It is a result that has already impacted the economy with Fonterra, NZ’s largest dairy producer, announcing approximately 523 job cuts to help them weather the storm.
Considering New Zealand’s lack of export diversity, the subsequent falls in dairy prices are likely to pose some significant pain for the economy. It also fuels the case for further monetary easing by the RBNZ and I am now subsequently predicting cuts to the Official Cash Rate (OCR) in July and September. It should also be noted that the fall in dairy prices is likely to impact the New Zealand Government’s projected fiscal surplus.
On release of the GDT result, the NZD subsequently declined sharply below the key 0.6600 handle and is now keenly eyeing the 65 cent level. It is safe to say, that there is little in the way to fuel any bullish moves by the currency and that the linear downtrend will likely continue in the short term. Also, any moves by the RBNZ to cut the official cash rate will see the embattled pair facing a significant depreciation, as a valuation under the 63 cent level now looks likely.
Looking forward, the elephant in the room really appears to be a potential decision by the US Federal Reserve to normalise their interest rate regime. US Fed Chair, Janet Yellen, stated today that they do expect to lift rates sometime in 2015 but remain cautious over the timing.
The likelihood of any US rate rise is really dependent upon the domestic and international economic conditions fuelling both inflation and unemployment. However, that dual mandate is not absolute and there are many now suggesting that the Fed needs to look at a wider range of indicators. So the timing for any potential rate rise is difficult to predict given the various political agendas at play. However, any rise in the US federal fund rates, coupled with an RBNZ OCR cut, could see the NZD tumble to rates not seen since the height of the global financial crisis in 2009.
Although a strong depreciation might support New Zealand exports, dairy farmers are still facing a crisis as the current dairy prices fail to meet the costs of production. Subsequently, New Zealand could very well be on the cusp of significant structural changes as capital moves into non-dairy aligned sectors.
Ultimately, time will tell which direction the NZD and global dairy trade heads, but it looks increasingly likely that the cows will end up having the last laugh at Farmer Joe.
This is a Guest Editorial which represents the views of and was compiled by Steven Knight, Market Strategist for Blackwell Global