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Roger J Kerr says local importers should be topping-up hedging levels with current NZD/USD rates near the top end of the range

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Roger J Kerr says local importers should be topping-up hedging levels with current NZD/USD rates near the top end of the range
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By Roger J Kerr

The overall value of the NZ dollar, the revised Trade Weighted Index (Chinese RMB now included on correctly weighted on trade flows) has returned to level above 79.

While the RBNZ assume a 75 TWI in their economic models and assumptions, as stated before they cannot hide from a highly performing and robust economy.

New Zealand remains an attractive investment destination for offshore players seeking return and diversification.

Outside random scares to our agricultural export industries in terms of climate, contamination and disease there seems to be little on the horizon that would send the NZ dollar down on its own account.

The currency forecasters who are currently predicting the NZD/USD rate to depreciate to below 0.7000 over the next six to 12 months must have expectations of the US dollar appreciating another 10% against the Euro from $1.0800 to 0.9800.

The alternative is that they see wholemilk powder prices collapsing again.

The debate surrounding the US dollar is whether the USD appreciation to date from $1.4000 to $1.0800 against the Euro over the last nine months has already priced in the US interest rate increase coming over the second half of 2015?

If the view is that the FX market has not yet fully priced the US interest rate increases then a EUR/USD rate below $1.0000 may still be on the cards. A week ago the EUR/USD rate was $1.0500, however the continually measured approach from Janet Yellen at the FOMC caused the markets to take profits on long USD position and the USD has weakened back to $1.0800.

My expectation is that the EUR/USD exchange rate will oscillate around the $1.0500 to $1.1200 range for several months as the divergence in monetary policy settings between the US and Euroland is fully known and factored in to the currency markets.

The chart below indicated that the EUR/USD rate at $1.0800 has well and truly caught up with the interest rate differential between the US and Europe. The US two-year swap interest rate already reflects several hikes in US short term interest rates by the Fed over 2015 and 2016.

Such a view leaves the Kiwi dollar in its now established 0.7200 to 0.7600 trading range.

Importers should be topping-up hedging levels with current NZD/USD rates near the top end of that range.

 

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Daily swap rates

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Opening daily rate
Source: NZFMA
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Source: NZFMA
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Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
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Source: NZFMA

 

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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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