More Downside For The New Zealand Dollar To Come

Oh the woes of New Zealand! The way I see it, this little country has at least five things going against it right now that I think will continue to weigh on its currency.

So let’s talk about these factors that are weighing down on the country all at once and you will see what I mean.

First of all, commodity prices have plummeted and this country depends heavily on exporting commodities around the world (predominately dairy and agricultural products).

A full two thirds of their exports are commodities. So you can see how serious the fall of commodity prices have (and will) affect them. When prices were high, their profit margins were fat. However, now that prices have collapsed, there profit margins have done the same since the price of what they can get for these goods and what it costs to get them to market are so much closer together now.

Formerly, these high prices helped to offset the impact of rising interest rates and a rising currency exchange rate. They’ve really been hit hard in one of their biggest exports, dairy. Dairy prices are down 50 percent off of their highs and that is putting a world of hurt on them.

In fact, Fonterra, one of the largest companies in New Zealand, has had to reduce their earnings estimates drastically because of all of this. Therefore it’s anticipated that it could take as much as $3 billion out of their economy. Now, let me be frank…a few billion out of this economy and a few billion out of New Zealand are two different animals entirely. This is a huge deal to New Zealand and can’t be overstated.

Secondly, tourism is slumping in New Zealand. Why is this important? One in ten jobs are now linked to tourism either directly or indirectly. So when tourism tapers off, it hurts them dearly.

Many economists estimate that tourism may slump as much as 15% this year. A massive loss in home values and equity portfolios around the world has made people all over the world “tighten their belt”. One of the easiest things to cut out is tourism, since that’s an extra of life. So with this huge dent in tourism, it is estimated that it could take another $1-2 billion out of their economy. So with this problem and the slump in commodities, that will already erase about $5 billion dollars…and in that small economy, that’s a ton of money for sure.

Thirdly, as you can imagine from what we’ve discussed thus far…there has been a collapse in the sentiment all over the country. This is causing the locals to shut their wallets much more quickly than before, thus exaggerating the problems that they are already going through.

In a recent survey that I saw, 64 percent of businesses there expected a further deterioration in their economy. 39 percent of businesses there say that they will be cutting back on expenditures on their plants, machinery and other equipment. So a hope of recovery right now is slim, in the eyes of business owners and retail consumers alike.

Fourth, is the problem that I see arising from a lack of ability to obtain credit. You see, New Zealand obtains about one third of their credit from abroad. Well, you know how that’s gone lately. Either businesses can’t get credit or the credit that they can get is much higher which makes doing business more expensive and squeezes profits all the more.

Most banks are requiring 20 percent down now which wasn’t the case before. So even what capital they do have is getting used and stretched all the more since the banking crisis has come about. This will further weigh upon business and retail consumer expansion for a good while longer.

The fifth problem is that they have a negative trade balance, interest rates falling from 8.25 percent down to the present 3.5 percent. I think rates will probably make it down to 2 percent (at least) before its all over with. As a result, their exchange rate is reflecting these problems, and all of the other problems mentioned above.

Also, New Zealand’s interest rate is under Australia’s interest rate. While this may only be temporary, it’s one of the reasons why money would flow to New Zealand over Australia.

You can tell times are tough when their central bank chops interest rates by 1.5 percent all at once and makes it known that there could be more to follow.

Therefore, I think you could easily see the NZD/USD rate come down to the 39 to 40 level in the coming months ahead as a result.

Once the stock markets around the world finally bust out of this sideways range to the upside, then we can reassess to see if investors are willing to tip toe back into these riskier, higher yielding currencies or not.

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