NZ Exports & the RBNZ Fallout
Later today, we have an important data release from New Zealand; the bi-weekly GDT Price Index. The figure plays an important role in determining the evolution of the currency. There has also been quite a lot going on lately that needs to be considered when gauging the impact.
While not dependant on interest rates, this is the first time we get data that’s from after the RBNZ’s surprise 50 point cut in the reference rate. Analysts had been pricing in at least two cuts by the end of the year. However, not many predicted that they would come at once. Exports are certainly affected by monetary policy, which completes the triangulation with the exchange rate.
What We are Looking For
For today’s data, we are expecting dairy prices to remain under pressure and dip a further -0.7%. This is compared to -2.6% in the prior fortnight. The index slipped back into the negative during the summer. This was as the supply and demand imbalance was corrected slightly, in part due to the increasing costs that were seen during the beginning of the year.
Going forward, the largest publicly traded dairy company projects prices to remain relatively high for the rest of the year. In their latest report to investors, Danone reported seeing the supply issues of the beginning of the year neutralizing. This would lead to a stabilized price with modest growth. The sentiment was echoed in Saputo’s quarterly report.
Tariffs and the Milk Market
One of the points to keep in mind when trading the NZD is the effect of the trade war. This is considering the country’s dependence on the export of dairy products. While the US certainly isn’t threatening New Zealand with trade action, they are the world’s largest producer of dairy. At the beginning of the year the US had dairy-trade-related issues with one of their largest customers, Canada; and the threat of potential tariffs increases the risk of sourcing dairy from the US.
The end result is that on top of the supply problems due to higher demand, the trade disruptions around the largest producer causes generalized anxiety and supports the price. China is a net importer of dairy products, and agricultural products are one of the sectors being used as leverage in the US trade discussions.
The Domestic Effect
Although New Zealand has taken considerable steps to diversify its economy, dairy still accounts for one-third of the country’s export profits. It has an impact on the evolution of the currency. With the consensus among dairy buyers that prices will be on the rise for the rest of the year, it’s one of the factors that contribute to supporting the Kiwi.
Of course, this is not enough to offset the dovish tone set by the RBNZ’s Governor, even after the 50 basis point cut. Many analysts are factoring in another cut to 0.75% by the end of the year.
Careful What You Wish For
While generally lower rates are seen as supportive of the economy, some in the business community in New Zealand aren’t happy with the RBNZ’s latest actions. The bank has a tradition of being very conservative and cautious with its actions. The sudden rate cut seems to be deviating from that perspective.
The increase in uncertainty about how the bank will act in the future is disconcerting for some businesses, especially related to the financial sector. Trying to jog the market by taking more aggressive action might backfire. The talk of needing more action by the central bank in the future is an indication that they don’t expect the economy to improve soon, either.