The New Zealand Dollar Outlook has Darkened Again after ANZ Survey Highlights Business Woes



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- ANZ business confidence survey points to more NZD/USD losses.

- Firms' own activity turns negative for first time since financial crisis.

- Thursday boost in risk appetite may help keep NZD afloat for now. 

- But growth and RBNZ rate outlook could weigh in months ahead. 

The New Zealand Dollar outlook darkened Thursday after the influential ANZ business confidence survey showed companies becoming the most pessimistic about their own future prospects since 2009, which multiple analysts have said is bad news for the Kiwi currency.

The ANZ Business Confidence index fell 8 points to -52.3 in August, which continues a two-year trend of increasing pessimism among Kiwi firms and leaves the broad barometer of sentiment at its lowerst level since April 2008. The index has fallen below zero and moved further and further into negative territory since the 2017 election. 

"The outlook for the economy appears to be deteriorating further, with firms extremely downbeat despite easier monetary conditions, fairly robust commodity prices, and positive population growth. Whatever the cause, the risk is rising that it becomes self-fulfilling. The decline in inflation expectations from 1.8% last month to 1.7% will be of particular concern to the Reserve Bank," says Sharon Zollner, chief economist at ANZ. 

ANZ's monthly survey made even more somber reading beneath the headline, where the index measuring firms' views on their own prospects for the year ahead fell into negative territory for the first time in the current economic cycle. Previously, companies had been increasingly pessimistic in their outlook for general business conditions but remained consistently upbeat about their own prospects so Thursday's data suggests a genuine deterioration in conditions on the ground in New Zealand. 

"We take particular note of this survey because businesses own activity has a good correlation with the NZD/USD. Businesses own activity outlook fell to ‑0.5pts from 5.0pts," says Kim Mundy, a strategist at Commonwealth Bank of Australia. "Inflation expectations also fell further to 1.7% from 1.8% in July, adding to the mounting evidence that the RBNZ is likely to fall further behind its inflation target over the coming year." 

Mundy says the own activity index has a good correlation with the NZD/USD rate has a good correlation with the. The implication of this is that, if firms' own activity expectations go the way of the broader confidence index over the coming months it could lead to yet more punishing losses ahead. The main index has, after all, fallen from 0 to -52.3 in the two years since the last election.

The responses used to compile Thursday's survey were mostly sent to ANZ before the Reserve Bank of New Zealand (RBNZ) cut its cash rate by 50 basis points to 1%, although ANZ says there was little difference in the content of responses that came in before and after the rate cut. That itself suggests that RBNZ action to date may not be enough to generate a meaningful pick-up in Kiwi economic activity. Markets were already anticipating those rate cuts albeit that many thought they'd come later in 2019.

The RBNZ has cut its interest rate three times in 2019, by a total of 75 basis points and to a new record low of 1%, in the hope of stimulating faster economic growth with lower borrowing costs. Kiwi inflation was already stuck a below the target, and RBNZ already in need of faster growth, even before the U.S.-China trade war began hurting the global economy. But trade-related slowdown in the economies of various trade partners has necessitated action. 

Above: NZD/USD rate shown at hourly intervals.

The NZD/USD rate was quoted 0.11% higher at 0.6343 Thursday but is still down 5.47% for 2019, while the Pound-to-New-Zealand-Dollar rate was 0.07% lower at 1.9269 but has risen 1.6% for 2019.

Thursday's price action comes after a statement from China's Ministry of Commerce stoked market hopes that another damaging escalation of the trade war between the world's two largest economies can be avoided, delivering a boost to so-called risk assets and currencies like the Kiwi. 

Above: NZD/USD rate shown at hourly intervals, alongside GBP/NZD rate (orange line, left axis).

Chinese officials said in a press conference Thursday they will enter talks with the U.S. next month and urged the U.S. to "create the necessary conditions for the continuation of talks", in an apparent reference to new tariffs intended to be imposed on Chinese goods exported to the U.S. from September. 

"The trade team of both sides has maintained effective communication.The two sides are discussing the issue with the Chinese economic and trade mission to the United States in September. At present, the most important thing is to create the necessary conditions for the continuation of consultations between the two sides....China believes that if China goes to the United States for negotiations, the two sides should work together to create conditions and promote progress," an official told The China Daily.

Embedded into the statements is an implied threat to discontinue those talks if the White House doesn't hold off on the new tariffs but markets saw the prospect of talks as being indicative of progress. It remains to be seen if the White House really will hold off on new tariffs given an absence of progress to date in previous negotiations but Thursday's excitement in the markets and boost for the Kiwi Dollar was previously tipped by analysts at TD Securities. And they say the Kiwi has legs to rise further as well.

"Our global macro risk index has pushed into extreme risk aversion territory, which typically offers a countertrend signal to fade the stress," says Mark McCormick, head of FX strategy at TD Securities.

McCormick says recent price action in New Zealand Dollar exchange rates has left the currency trading at a "massive discount" to the fundamental value ascribed to it by the bank's high-frequency-fair-value finanancial model. 

He's told clients that if and when markets become less concerned about the U.S. and global growth outlooks, that discount could then seem to investors like it's no longer appropriate, with consequent buying leading the Kiwi higher.  

"NZD screens at a massive discount, which against current levels sits around 3.5%. In other words, NZDUSD should be trading around 0.66, making it the cheapest currency in the G10," McCormick writes, in a note to clients. 

Markets have been in 'risk off' mode for much of the past week, with safe-haven currencies and assets like the Yen gold in demand, while riskier counterparts including stocks and the Kiwi Dollar were on sale amdist ongoing trade war hostilities, and another inversion of the U.S. bond yield curve.

"GRMI's message suggests that mean reversion trades may benefit in the very short-run, reflecting the reduction of stress. It is a very short-term signal, especially as GMRI has been in risk-off territory since early August," McCormick says. "NZD, GBP, EUR, and AUD look cheap."


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