A significant threat to the New Zealand economy and particularly the value of its currency, is the so called ‘El Nino’, the weather event which happens every 3-6 years in which temperatures fluctuate rapidly, hugely increasing the chance of drought. This year brings an El Nino weather event that is expected to be the worst since 1998 and could consequently send New Zealand into a drought inspired recession.
How will El Nino effect New Zealand Agriculture
With a 15% decrease in the yield of wheat in Australia, cyclone season arriving quickly and droughts already present in Papua New Guinea, Vanuatu and Ethiopia, New Zealand face a tough season with ground temperatures expected to reach record levels. Areas such as Canterbury and Wariapa are already struggling and should the weather event be as bad as forecast the dairy production of NZ could suffer substantially. The lack of rain water increases farming costs, reduces the gross value of add on products and increases the mortality rate of livestock, resulting in an increase in price and a decrease in supply for New Zealand dairy products. Should this event be as bad as expected the chances of a further interest rate cut by the RNBZ is significantly more probable.
El Nino’s effect on the currency
Daily turnover of the New Zealand dollar is $105bn as it attracts a significant volume of ‘Hot Money’. This daily turnover is 56% of GDP and leaves the Kiwi very exposed to the value of its currency. The NZDUSD is up 5.8% this month, reacting positively to Chinas abolition of its ‘1 child policy’ and successive stronger GDT auctions. This vast fluctuation makes it difficult for companies to hedge their currency risk (The majority of M&Cs in New Zealand are foreign firms) and makes it difficult for the central bank to set the correct monetary policy. There are issues currently with inflation and slow growth and this strong $NZD is certainly not helping matters.
Having cut 3 times since June, further easing of monetary policy, when the above factors are taken into account, seems highly probable. Governor Wheeler was less dovish in the October meeting than he was
in September but the risks remain ever present and only time will tell. Lloyds see stabalisation of the NZDUSD around 0.65 but should The Fed increase their rate in December and weather conditions/inflation/growth become any worse, the downside to the NZDUSD will be huge. NZDUSD currently trades at 0.6630.