NZD: The drought is intensifying – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 28, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that an intensifying El Nino weather event presents significant risks as NZ slips back into a drought.

    Key Quotes

    “From the perspective of milk prices, given NZ’s large share of global dairy trade (~40%), a drought-related fall in domestic milk production typically results in upward pressure on prices. While from the perspective of broader economic growth, the simple correlation between leading indicators of El Nino (like the Southern Oscillation Index; SOI) and agricultural/milk production highlights that recent trends warrant close monitoring.

    To be fair, the SOI is not a perfect predictor of droughts, each drought is unique, and disentangling drought-specific impacts on growth and prices is an imprecise exercise. However, a recent paper by the RBNZ provides some useful guidance on the implications of a drought in NZ across a number of economic variables. Historically, compared with normal weather conditions, the RBNZ find that a typical drought has the following consequences (with specific estimates for the 2013 drought in parenthesis):

    Economic growth: ~30bp lower in annual average terms, with a trough 0.5% lower in year-ended terms two quarters after the drought (2013 drought: -60bp).

    Dairy prices: ~5% higher, with the peak response in the third quarter following the drought (2013: +10% higher).

    Consumer prices: Fall by ~2% in the years following the drought (2013: Negligible impact, with offsetting rise/fall in tradables/non-tradables).

    90-day rate: Falls by ~50bp over subsequent years (2013: ~25bp lower).

    NZD TWI: Negligible impact (2013: 3% lower, with temporary near-term appreciation as dairy prices rise).

    All in all, a severe drought is not currently imbedded in our current forecasts, but these numbers provide a flavor of the sensitivities and suggest a hit to growth as large as ~-50bp is quite possible.”
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