Published: November 30th, 2022
The New Zealand Dollar (NZD) began the week on the back foot against some of its G10 peers as a selloff looms for Asian and antipodean currencies exposed to current events in China, though analysts think steep losses could be avoided.
NZD has been in a period of outperformance in November that’s seen it hold its ground against large-economy peers like GBP. But as month-end draws nearer both the New Zealand and Australian Dollars (AUD) are on weaker ground as forex traders seek shelter from potential economic turmoil in China. The country has been rocked by protests against Beijing’s continuing ‘zero covid’ policy, and the latest restrictions on movement.
Société Générale’s forex strategy unity wrote in an analyst note that the protests 'have cooled some of the optimism around the end of lockdowns and hit risk-sensitive fiats everywhere.’
Images from protests across China were being widely shared on social media over the weekend and continued this week amid signs that more strict lockdowns are looming. Markets are unaccustomed to scenes of protest in a society that outsiders assume to be authoritarian and rule-abiding.
A report in the Wall Street Journal said the situation in China has ‘jolted Asia-Pacific investors, as worries mount that the protests could hamper growth in the world's second-largest economy’.
Chinese equities were lower on Tuesday (29th Nov.) with Hong Kong's Hang Seng Index down a full percentage point. The onshore yuan was weaker against the dollar by 0.5 per cent, having sunk more than one per cent at the open, the biggest 24-hour drop since April.
Société Générale added that ‘NZD was hit at the start of this week's session as fears about domestic upheaval in China sent investors looking for safety. There are worries now that Beijing’s unyielding zero-Covid policy might darken the outlook for growth down under.
Anti-lockdown protests kicked-off after a deadly fire in Xinjiang on 23rd November. Some residents died after being trapped in the residential complex by harsh Covid restrictions.
Given the light economic and event calendar this week, NZD will be subject to the news cycle and broader investor sentiment as the week moves forward.
New Zealand is a small market heavily dependent on commodity exports and China is its biggest customer. Shifts in demand can heavily affect the country’s overall economic performance and financial flows.
NZD finished Q3 on a weaker trajectory that analysts believed would lead to declines in Q4 2022 and Q1 2023, with two factors likely to weigh on the Kiwi.
The first is the country's cooling housing market. The second is a breakdown in the country's balance of trade exports to China start to slow down.
‘We believe New Zealand’s balance of trade will fall back somewhat as the Chinese property sector continues to slow down,’ said Capital Economics in a research note.
The ebb and flow of Chinese demand remains a crucial driver of economic fortunes down under, as it is the primary destination for New Zealand and Australian exports. If China's economy starts to slow down, it could negatively affect Aukland's own growth forecasts.
The dour predictions arrived just as NZD was solidifying its reputation as one of 2022's top-performing currencies. Only the mighty Greenback and Canadian Loonie were performing better at the time.
According to some analysts, part of NZD's outperformance has been driven by spiking commodity prices, which have been aggravated by Russia's invasion of Ukraine, the squeeze on energy supplies caused by Western sanctions, and ensuing supply chain disruption.
Across the Tasman Sea, a cooling market in Australian residential housing starts and mortgages was also expected to weigh on sister currency AUD, as the knock-on effects of recent Reserve Bank of Australia (RBA) rate hikes make themselves felt across key sectors.
‘There are unmistakable signs that Australia’s housing sector is starting to slow. Residential construction has dropped by almost seven per cent in Q2 2022, quarter over quarter. Supply shortages may be partly the cause, but the sector is also sensitive to rises in the interest rate. As house prices fell in August at their fastest rate since 1983, we believe it won’t be long before the broader sector finds itself in an extended slump.’
Investors may be underestimating how soon RBA rate hikes will be reversed, the firm suggests, if central bankers in Sydney are forced to respond to a housing market meltdown.
‘If the experience of past housing downturns is any guide, we believe the RBA will reverse course next year. The extended impact of that will see a fall in Australian government bond yields next year, whcih will exceed the yield drops expected for US Treasuries. Combined it will keep downward pressure on AUD for the coming months.’
Given its outperformance for much of the year, it's easy to forget that NZD began 2022 near the bottom of the G10 league table, hammered by headwinds including a jump in ten-year yields on US bonds, which had risen to their highest levels since February of 2020. The rise in demand for government debt sent most of the world's biggest stock markets into losses.
Given NZD’s 'high beta' status and its historically close connection to shifts in broader risk sentiment, the Kiwi was on the up when markets were trending higher. It began to fall again when January’s equities sell-off got underway.
The NZDUSD exchange rate fell by a full third of a percentage point to trade at 0.7185, while the pound to Australian dollar exchange rate lifted by one-quarter of one per cent to reach 1.8969
Analysts at Bloomberg posted a blog reflecting what many analysts believed at the time: 'markets headed lower as bond yields began to rise. Let’s watch to see if US stock traders decide the equities sell-off should continue, or ease off.'