Pain for consumers as greenback rises
CONSUMERS appear likely to be the hardest hit as the US dollar continues to strengthen and the kiwi nears lows not seen in almost three years.
New Zealand fuel prices are already at record highs, partly because of the weakened New Zealand dollar, and further weakening will result in households and many businesses being hard hit in the months ahead, in a variety of ways.
Since May the foreign exchange cross rate has plunged from US75c to just above US64c yesterday, as the US economy goes from strength to strength.
Craigs Investment Partners broker Chris Timms said the US dollar strength looked set to continue.
The US central bank, the Federal Reserve, was in a ‘‘raising cycle’’ with its three upward interest rate moves, plus recent positive economic data, including near 50year lows in unemployment and more than 130,000 new jobs last month, he said.
‘‘The US [dollar] should strengthen further from here, which means further weakening for us.’’
Some analysts have suggested the 2018 average could go as low as US62c for the calendar year.
Mr Timms said the cross rate would have to ‘‘drop fairly rapidly’’, given there was less than three months of the year to go, to average out at US62c.
‘‘[However] there’s nothing in sight to strengthen us against the US dollar,’’ he said.
Craigs was maintaining a forecast range of US61cUS66c for the year.
While the country’s exporters and people with overseas investments would be gaining, costs would mount for importers, including fuel importers.
The increased costs of imported goods would ‘‘in time’’ flow through to retailers and some transport companies, then eventually to the consumer.
‘‘For the likes of Mum and Dad, it’s fuel prices and groceries; then given the flow through [later], cars, whiteware and appliances.
‘‘Costs will eventually be passed on to the consumer.’’
Analysts have predicted some respite may be on the way after China’s central bank announced a steep cut in the level of cash its banks must hold in reserve; which is estimated to free up $US175 billion ($NZ272 billion) to shore up the faltering Chinese economy.
The freeing up of cash would be good for New Zealand exporters, given China was the country’s largest trading market.
However, countering that boost is a current review by the Chinese Government of its crossborder ecommerce channels, which was already having negative impacts for some Kiwi exporters.
‘‘That in itself is already causing a lot of uncertainty,’’ he said.
ASB chief economist Nick Tuffley said the ‘‘key catalyst’’ for the kiwi’s decline of 2.7% against the greenback last week was the sharp increase in the US Treasury bond yield, which hit a sevenyear high interest rate of 3.23% last Friday.
‘‘Further upward pressure on US Treasury yields is likely to see the New Zealand dollarUS dollar test new lows . . . which could be US63.5[c] this week,’’ he said.
Mr Tuffley said he had a stronger US dollar outlook, given solid US growth outlook, its higher terms of trade and weaker outlooks for the Chinese and emerging markets.
BEIJING: China’s central bank this week announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.
The reserve requirement cut, the fourth by the People’s Bank of China (PBOC) this year, comes as Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further, with investment growth slowing to a record low.
Reserve requirement ratios (RRRs) — at present 15.5% for large commercial lenders and 13.5% for smaller banks — would be cut by 100 basis points effective October 15, the PBOC said, matching a similarsized move in April.
Beijing has stepped up liquidity support across the financial system this year as policymakers focus on calming fears of capital outflows and seek to soothe battered markets even as anxiety grows that a heated trade war with the United States could deal a damaging blow to the broader economy.
China’s yuan currency has faced strong selling pressure this year, losing more than 8% between March and August at the height of market worries, though it has since cut losses as authorities stepped up support.
This week’s move will inject a net 750 billion yuan ($NZ169 billion) in cash into the banking system by releasing a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of that to offset maturing mediumterm lending facility (MLF) loans.
China’s economic growth rate slowed slightly to 6.7% in the second quarter yearonyear, still well above the Government’s fullyear target of around 6.5%. But some key activity indicators have weakened more sharply.
The RRR cut indicated the central bank was worried about the impact of ‘‘external shocks’’ to markets such as a speech last week by US Vicepresident Mike Pence, chief economist at Zhonghai Shengrong Capital Management Zhang Yi said.
Mr Pence intensified Washington’s pressure campaign against Beijing last week by accusing China of ‘‘malign’’ efforts to undermine US President Donald Trump ahead of next month’s congressional elections and reckless military actions in the South China Sea.
Mr Pence’s speech marked a sharpened US approach towards China, going beyond the bitter trade war between the world’s two biggest economies, which has magnified concerns about the outlook for China’s economy.
Weakening Chinese exports were already a drag on growth in the first half of the year after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new US tariffs are imposed.
The ‘‘very timely’’ RRR cut was big enough to help boost confidence in the economy, said Xu Hongcai, deputy chief economist at the China Centre for International Economic Exchanges, a Beijing think tank.
‘‘The trade war’s impact on the economy is showing. There is room for further reductions and I expect another 1 percentage point cut by the yearend.’’
China would also adopt a more proactive fiscal policy, including potential tax cuts on a larger scale, to safeguard economic growth, staterun Xinhua News Agency reported, citing Finance Minister Liu Kun.
Total tax cuts for the year are expected to exceed 1.3 trillion yuan, according to Liu.
‘‘Some regions and companies have been hit [by trade frictions], but China has the ability to minimise the impact,’’ Liu was quoted as saying. — Reuters