Since June, Fonterra has cut its farmgate milk price forecast to a mid-point of $6.75 a kg of milk solids from $8.00/kg earlier in the year - below break-even for many farmers.
Export meat and log prices have also fallen sharply.
“It’s all feeding into a weaker Kiwi dollar, and we think that will continue. We are still sticking with our call of US55c by the year’s end,” Kerr told the Herald.
However, a lower currency can soften the economic impact of low export prices and can give the tourism sector a boost.
A weaker New Zealand dollar helps exporters as their export proceeds - settled in US dollars - convert into more NZ dollars than would be the case in times of Kiwi dollar strength.
Likewise, a weak Kiwi gives New Zealand’s important tourism sector a boost as it makes the country a more attractive destination for visitors, which can in turn benefit the balance of payments current account.
However, a weak currency makes imports more expensive.
“On the one hand, it helps our exporters at a time when these prices are toppling,” Kerr said. “But it will add a little bit of inflation as well.”
Kerr said traders tended to view the New Zealand and Australian dollars as a “proxy” for Asia, and that they were expressing a view that Asia is weakening by taking short positions in the Kiwi and Aussie dollars.
Fears over New Zealand’s terms of trade have been another dark spot on the horizon for the Kiwi - most of that driven by sharply lower demand for New Zealand’s key commodities from its biggest market - China.
“We will see more stimulative measures out of China, but the damage has been done,” Kerr said.
Added to the mix has been steadily rising bond yields, here and around the world, at a time when central banks had abandoned attempts to support the market through quantitative easing, or bond buying - methods that were employed widely during the Covid-19 pandemic.
A key driver of rising yields has been the all-important US Treasuries market, and comments from Federal Reserve chair Jay Powell at the Fed’s economic conference at Jackson Hole, Wyoming, last week showed the direction of the US dollar and US bond yields would be higher still.
Powell said at the conference, which was attended by the Reserve Bank’s chief economist Paul Conway, that the Fed would consider another interest rate rise to temper inflation.
The Financial Times said traders still expected the Fed at its September meeting to hold rates steady at a 22-year high, but futures markets on Friday pushed their expectations for a cut in the federal funds rate to June 2024 - a month later than they expected at the start of the week.
The sell-off in US government bonds, which took yields on long-term debt to a 16-year high at the start of this week, continued. In the bond market, yields rise when prices fall.
Aside from monetary policy, world bond markets have had to take on the sheer weight of government borrowing globally.
Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said the local currency was doing a better job of reflecting New Zealand’s economic situation and outlook than the interest rate markets.
He said there was a lot more room for the currency to depreciate, adding a sharply lower Kiwi would make inbound tourism more attractive.
New Zealand’s current account deficit in the year to March was 8.5 per cent of GDP - which is high, relative to history.
“The main way that that current account is assumed to recover is to say that tourism revenues - which have been lagging - will continue to recover,” Pepper said.
“It’s good. It needs to happen.”
In the interest rate markets, yields - particularly at the longer end - have been rising, partly reflecting increased supply.
The US Treasury has boosted its estimate for federal borrowing for the current quarter as it addresses a deteriorating budget deficit.
The Treasury Department increased its net borrowing estimate for the July through September quarter to US$1 trillion, up from the US$733b it predicted in May.
Domestically, the New Zealand Government is borrowing at the rate of $400m-$500m a week through the bond market.
Harbour’s Pepper said there was also an increased focus on New Zealand’s external vulnerabilities - specifically, a current account deficit and higher levels of Government borrowing, which was feeding into higher interest rates.
The local yield curve has been inverse - when short-term rates are higher than long-term rates - for over a year, but the bump higher at the long end has made it less so. Inverted yield curves are taken as a sign of recession.
In the interest rates markets, the NZ two-year swap rate - which can influence home mortgage rates - has risen to 5.54 per cent, from 4.73 per cent in February.
Two-year bond yields have risen to 5.52 per cent, from 4.3 per cent in March.
At the long end, 10-year bond yields have gone to 4.98 per cent, from 4.61 per cent in May.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
