By Roger J Kerr
The near term direction of the NZD/USD exchange rate from the current position of 0.8100 will largely be determined by what the central banks of our two major trading partners, Australia and the US, say and do over coming weeks.
The stop/start nature of the US economic recovery again has many pundits calling for Ben Bernanke at the Federal Reserve to instigate “QE3” monetary stimulus to help employment growth.
The Fed’s FOMC meeting this Thursday morning will provide some pointers to how the Fed are now reading conditions and the outlook for the US economy.
If they do decide to stimulate further by printing more US dollars and pumping them into the banking system, the Kiwi dollar will be headed towards 0.8500 as the USD weakens with the additional supply.
One argument for not implementing QE3 in the US is that the banks are not lending the additional money through to households and businesses in the economy due to their much tighter lending criteria. Perhaps Bernanke and his Fed cohorts should “tag” the additional funding as only being available to the banks if they on-lend to end users as the Brits have done.
However, do not expect a QE3 decision as this week’s meeting, the September meeting is the more likely timing if it is to happen.
While the US economic data is up and down with a weak June quarter, my overall view is that they will conclude that further monetary loosening will not be that effective and perhaps be counter-productive.
Therefore, the chances of the Kiwi appreciating further to 0.8500 over coming weeks on this score are seen as low.
The Reserve Bank of Australia has been very flip-floppy in their reading and outlook for the Aussie economy of late.
Their last meeting minutes and recent speeches by Governor Glen Stevens were more upbeat and have been behind the AUD shooting straight up to $1.0470 against the USD. The Australian moneymarkets are still pricing-in another 0.80% of OCR cuts over the next year; however the last RBA pronouncements suggested that they were no longer biased to further easing.
There is no question that big parts of the Australian economy are taking a hammering with the higher AUD value.
Their tourism industry is in the poop as they have become a very expensive destination for overseas visitors. Tourism industry players are slashing prices for domestic tourism and this contributed to the low inflation result in Australia last week for the June quarter.
My view is that the RBA will again be forced to flip-flop back the other way to cutting their OCR to bring the value of the AUD down.
They need weaker domestic economic data over coming weeks to support such a decision. Australian retail sales and building consents figures this week will be part of that equation. The AUD has moved up strongly to $1.0470 despite their base and precious metal prices going the other way over recent weeks.
The AUD has benefited from safe-haven buying away from Europe; however the global market uncertainties are reducing as European leaders such as Merkel, Hollande and Draghi all pronounce intentions to do “whatever it takes” to save the Euro. The AUD gains therefore appear all a bit too much of hot air that could reverse as thin northern hemisphere FX markets decide to take AUD trading profits and become aggressive AUD sellers. The AUD gains are clearly a major divergence from the metal and mining prices that drive the Australian economy and currency (see chart below).
The AUD strength does not look sustainable at all, therefore I still favour the Kiwi dollar retuning to 0.7800 when the AUD corrects back four of five cents against the USD.
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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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