Dwayne Jones, an experienced treasury specialist at Bancorp provides a quarterly finance market update, dissecting the current state of the New Zealand market.
Stubbornly high core inflation, tight labour markets, and wage inflation continues to impact upon the developed economies, which has seen the Bank of England, Norges (Norwegian) Central Bank, Reserve Bank of Australia and the Bank of Canada all hiked interest rates further than forecasters had projected. Even the Federal Reserve, who paused their hiking cycle for the first time since March 2022 signalled, “We don't see rate cuts any time soon,” before adding, “it will be appropriate to raise rates again this year, and perhaps 2 more times.” For once, central bankers are having to earn their wages!
But while most central bankers have gone to great lengths to actually hike interest rates beyond expectations, or imply there are further rate hikes to come, following their 25bps rate hike in May, which lifted the OCR rate to 5.50%, the Reserve Bank of New Zealand’s Governor, Adrian Orr, signalled his intention to pause the hiking cycle for the rest of the year as “the outlook for fiscal policy is contractionary on demand,” “aggregate spending is declining,” and “businesses are reporting slower demand for their goods and services.”
In a further dent to the nation’s confidence, New Zealand officially entered a recession after Q1 2023 GDP contracted -0.1%, which combined with Q4 2022’s revised -0.7% means the local economy contracted -0.8% in the 6-months from October 2022 to March 2023. Furthermore, the ratings agency, S&P Global, announced the country’s key credit risk was its current account deficit, despite it improving from -9.0% to -8.5% in Q1 2023, while the IMF warned, “the RBNZ will need to hold interest rates at their current level ‘for a prolonged period’ and should remain open to further hikes if necessary to tame inflation.”
Looking ahead, we believe the RBNZ is now essentially on-hold until the November RBNZ meeting given that Governor Orr’s comments at the May MPS suggests it’s unlikely he would change his economic outlook by the 12-July meeting, while the General Election will likely result in the RBNZ maintaining the status quo as, generally speaking, central bankers don’t want to be seen to be placing undue influence on political events. The major Q3 data releases will be Q2 CPI (19-July), employment (2-August), retail sales (23-August), the Treasury’s Economic and Fiscal Update 2023 (12-September), and Q2 GDP (21-September). Beyond the RBNZ meeting and data releases, the focus from financial markets will be on the depth and duration of the domestic recession, and corporate performance and forecasts, with a particular focus on delays in receivable terms.
Internationally, investors will be monitoring the ratings agencies for any hints of a possible NZ ratings downgrade, while the performance of the NZD and NZ interest rates will be largely dependent upon international inputs, especially international equity volatility, as liquidity drains ahead of the northern hemisphere summer.
USD weakness has seen the commodity currencies rally strongly, although it should be noted the NZD underperformed its peers. The NZD/USD has reverted back in to its recent 0.6100-0.6350 range, which will likely consolidate ahead of the next Federal Reserve meeting on 26 July, as per the chart below. The NZD/AUD has bounced off the 0.9050 level within its recent 0.9050-0.9350 range, NZD/EUR and NZD/GBP remain just above their recent lows, while NZD/JPY has surged to an 8-year high on interest rate differentials.
Market Update Insight: Here are a few key takeaways for New Zealand businesses in light of the recent events
As pro-active Treasury specialists, it is important that companies actively manage their funding arrangements and cross-border flows in order to protect against adverse movements and unnecessary risk. This includes, but is not limited to:
Reviewing your treasury policy to ensure it is fit for purpose, especially given the heightened volatility within the global economy. And if you don’t have one … get one asap!
Make sure the policy is covering your actual exposures. It’s not just FX and interest rates, but working capital, term-debt, commodities, cash, funding, and liquidity.
Maintain policy compliance. This is what protects you and the company. Diversify export channels: The export sector, particularly the dairy sector, has been struggling in recent times. Businesses should consider diversifying their export channels to reduce their reliance on a single market or product, which can help them weather the impact of market fluctuations.
Review your transactional banking arrangements, receivables management, and forecasting. Cash-flow is imperative in protecting all businesses, ensure you are maximising the utilisation of cash and working capital management within your company’s receivable and payable processes.In summary, New Zealand's economy faces challenges from both domestic and international factors. While the RBNZ's rate hike may have been an attempt to avoid pre-emptive rate cuts, it may ultimately contribute to an impending recession. Companies should proactively manage their funding arrangements and cross-border flows to protect against adverse movements and unnecessary risk.
This article was provided by Dwayne Jones, an experienced treasury specialist at Bancorp. Further quarterly reports will be provided by Dwayne and his team to keep you all up to date with the state of the market. For more information contact Dwayne via email at d.jones@bancorptreasury.com
Bancorp accepts no liability for any actions taken or not taken on the basis of this information and it is not intended to provide the sole basis of any financial and/or business evaluation. Recipients of the information are required to rely on their own knowledge, investigations and judgements in any assessment of this information. Neither the whole nor any part of this information, nor any reference thereto, may be included in, with or attached to any document, circular, resolution, letter or statement without the prior written consent of Bancorp as to the form and content in which it appears.