By Roger J Kerr
An unsustainable 'converging wedge' is the best way to describe the NZD/USD exchange rate trading patterns over recent weeks.
The highs are becoming progressively lower for the Kiwi, yet it continues to bounce off the 0.8100 area, resulting in the arrowhead becoming sharper as each day passes.
A break-out from the wedge either way is certainly brewing and one still has to favour that break-out being to the downside.
Despite admirable (however futile) attempts to jawbone the NZ currency value lower by the Prime Minister and Governor of the RBNZ over recent weeks, the reality continues that New Zealand is still seen by many as a safe place to invest your money relative to poorly performing economies elsewhere in the world.
Local economists may talk about lower than expected GDP growth, benign inflation, interest rates lower for longer and falling commodity prices as good reasons for the Kiwi dollar to depreciate, however that view is too locally focused and not recognising that exchange rates are relative prices, and relative to the rest of the world our economic health stacks up pretty good these days.
I prefer to take my cue on the outlook for the NZ economy from what the markets are telling us, not from some backward looking economist.
The markets in the form of the high NZ dollar value and the rising NZ sharemarket are saying that the economic outlook is positive and foreign investors/traders are recognising these positive signals and voting with their dollars.
The markets suggest the Kiwi dollar staying high, however I still favour a short-term correction downwards over coming months, followed by gains in late 2012 and into 2013.
So, looking ahead over coming weeks/months, what will be the game breaker for the Kiwi dollar to break-out to the downside and depreciate below 0.8000?
So far we have not had a strong enough event or catalyst to stimulate speculative selling of the Kiwi dollar to push it down.
I would have thought that the 10% plunge in Wholemilk Powder prices at least week’s Global Dairy Trade/Fonterra online auction would have been sufficiently negative to cause a re-think on the Kiwi. However, the currency market response was strangely muted.
The OCR Review by the RBNZ this week will be another opportunity for Alan Bollard to comment about the negative impact of the high dollar on the export sector. The adverse economic implications of the high Kiwi are now more pronounced as dairy, meat and other export commodity prices reel back down from their 2011 highs.
The potential negative catalysts for Kiwi selling therefore are seemingly not going to come from local economic developments, however from external sources:
- Quite apart from their political machinations, the Australian Gillard Government has a lot of pressure on the RBA to ease monetary policy to take the pressure of their fiscal policy. Provided inflation numbers this week are not above expectations, further interest rate cuts are guaranteed. Add on further weaker Australian economic numbers and the international investor love affair with the Aussie dollar is well and truly over. The correction down in the gold price is well underway from last year’s gains, the AUD/USD looks set to follow.
- Europe is still a basket-case in my view, despite the IMF receiving funding pledges over the weekend. The Presidential elections in France and the candidate’s economic policy prescriptions highlight the sheer denial about what they have to do in Europe to rectify their debt/deficit problems. France is failing to face up to the austerity measures that are necessary and might be the next target of attack for the financial markets. The balance of probability has to be that the Euro weakens to below $1.3000 against the USD and the NZD follows.
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* Roger J Kerr runs Asia Pacific Risk Management. 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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