Will the Kiwi Nation Be First To Emerge from the COVID Crisis?
In the early hours of Monday, Nov. 23, New Zealand’s quarterly retail sales were shown to have jumped by 28% in Q3 2020. This is 8% higher than expected and represents a remarkable improvement on last quarter’s -14.8% reading. Core retail sales figures, which exclude big-ticket items such as cars, also beat expectations by coming in at +24.1% versus Q2’s -13.7% reading. The data came off the back of an easing of COVID-19 restrictions and the reveal that spending between July and September more than offset the slump experienced between April and June.
Westpac has reported that these figures have seen spending in most sectors of the economy reach or even exceed pre-COVID-19 levels. Grocery spending, the only exception, was down over the quarter, perhaps due to more people choosing to eat out with the easing of restrictions. Hospitality, while also experiencing a rebound, is still some 5% below pre-COVID levels, probably due to border closures and travel restrictions.
Currency Outperformance
November has seen the New Zealand dollar breaking out of its range to trade above an important line of resistance at 0.68 against the US dollar. This resistance level goes all the way back to April of 2019, but far from being just a USD phenomenon, its recent move has seen NZD outperforming all of its other main trading peers, including the euro, yen, Swiss franc, Canadian dollar and Australian dollar.
November has seen the Kiwi dollar breaking out against the euro, with the single currency dipping below the 1.71 level for the first time since February. If the NZD is charted as the base currency in the pair, this level is at 0.58. Against the yen, it breached September’s yearly highs of 71.977 on Nov. 11 to set a higher-high of 72.795, a level last seen at the end of January. It has since dipped back down and is currently trading at around 72.054. New Zealand’s dollar has performed similarly against the Canadian loonie as it has against the greenback, with November’s surge to 0.91 representing a level last seen in the pair going all the way back to April 2019. Finally, the week of Nov. 16 saw the Aussie dollar dipping below the 1.056 level against the Kiwi. This level has held as support in April, July, and early November. It is now trading at price levels last seen in mid-April.
A Model COVID-19 Response
The county’s premier, Jacinda Ardern, who has recently been re-elected in a landslide victory, has been held up as a shining example in her handling of the crisis. New Zealand’s approach has perhaps been best characterised by the Reserve Bank of New Zealand’s governor, Adrian Orr, when he stated that: “We determined that it is better to risk doing too much too soon, rather than too little too late.”
In practice, this has involved uncompromising measures introduced early and strictly enforced. New Zealand initiated a nationwide lockdown on Mar. 26, while other leaders were vacillating between prioritising the health of their economies or that of their general public. Add to this, a highly dovish stance from the Reserve Bank in its cutting of interest rates from 1% to 0.25%, as well as a 100 billion NZD in bond purchases, and a generous dose of fiscal stimulus from the government to the tune of 50 billion NZD. All the above have been put forward as reasons for how effectively the crisis has been managed by the antipodean nation. They have been targeting the pandemic itself, fragilities in the banking system and the hardships imposed on the populace by lockdown measures. Of course, the country has also benefited in being a remote island nation that is sparsely populated and centrally governed, however, the effectiveness of its response is undeniable.
Negative Rates in the Spotlight
New Zealand’s effective crisis response, improving economic conditions, and currency outperformance, make it a key economy to watch. At HYCM, we are monitoring the situation closely because we regard New Zealand as something of a canary in the coal mine. This is because, should other countries begin to follow suit and emerge from the COVID crisis, the country’s policy decisions may provide investors with a crucial warning signal as to deteriorating conditions in the worst case, but may also provide some indications of how other economies, markets, and currencies could perform in the best case.
The country’s central bank has been signaling to markets that it is willing to drop interest rates into negative territory for a while now. So far, it has thus held off on doing so, however, it continues to nominally maintain this stance despite improving economic data. Some are wondering as to the logic of continuing the same policies it was talking up in August, when the virus re-emerged in the country. However, seen in the light of its “better safe, than sorry” approach, dangling the possibility of a deluge of cheap money, seems to be in keeping with its overall approach and may just be a further bullet in its policy weapon that it may not need to resort to firing. We will continue monitoring the situation and we urge our readers to do the same. However, one key point to note is that at the last RBNZ central bank meeting Governor Orr said that the RBNZ would need 100bps less easing to come. The NZD 10-year bond yield market shot higher as bond traders begun to price out the chance of negative rates. At the moment, negative rates seem unlikely and any further explicit walk back from this policy will strengthen the NZD.