By Roger J Kerr
Similar to our medal-winning performances at the Olympic Games, on a per capita basis the Kiwi dollar also continues to punch above its weight in global foreign exchange markets.
The NZD/USD has moved back up to the top end of its trading range at 0.8190 as the US dollar itself has weakened against all major currencies.
It is very odd indeed that the US dollar has depreciated following better than expected US jobs data on Friday 3 August where the 163,000 increase in employment was well above prior consensus forecasts and the low levels of recent months. The stronger than expected jobs data does reduce the probability of further QE3 monetary policy loosening by the Federal Reserve in the US, which is always seen as negative for the US dollar value (as more USD’s are printed and put into supply).
Therefore it is unusual that the USD has weakened on the employment news, however the European markets took heart from latest ECB statements and the Euro strengthened to $1.2380 against the USD.
After three months of weaker economic numbers in the US it does now appear that at both the household (real estate) level and business firm level the US economic recovery is back on track.
The weaker USD is therefore not expected to last and very soon the currency markets will recognise that the US economy is far superior to Europe.
The far more likely scenario is that the USD strengthens against the Euro to below $1.2000 than weaken back above $1.2500.
On this basis the NZD/USD rate may not last too long above 0.8100.
The correlation of the NZD/USD exchange rate to the USD currency index has always been a close one, however the latest gains to near 0.8200 does see a divergence far higher for the Kiwi dollar than what normally is the case.
The USD Index suggests the Kiwi should be closer to 0.7600 at this time (refer chart below).
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Looking back on the last two months, the NZ dollar strengthened in early July on safe-haven investment inflows at a time when the USD itself also strengthened (that is, Euro weakness).
Unless Europe blows up again it is hard to see that situation repeating itself. The NZD/USD rate is arguably over-valued at 0.8190 short-term, based on its correlation to the USD Index.
The NZ dollar continues to be pushed up and down due to global economic and investment/financial markets events and is not being too influenced by local economic announcements.
Credit rating agency, Standard & Poor’s re-affirmed the NZ Government’s sovereign rating last week with generally positive comments on the Government’s handling of their economic policies.
Compared to other countries, New Zealand’s economic fundamentals of positive GDP growth, underpinned by agricultural export commodity prices, is supportive of a stable to stronger currency value in the medium to longer term, not a weaker one.
Add on the prospect of increasing NZ interest rates in 2013 as inflation risks increase along with the stronger GDP growth, it is difficult to see the NZ dollar being much below 0.8000 for some time.
The question is whether a weaker Euro, weaker commodity prices and weaker global sharemarkets will cause another Kiwi dip back to the mid 0.7000’s before that time?
So much depends on AUD movements against the USD over the short-term.
Recent AUD gains to $1.0550 against the USD are at odds to the flat to lower hard commodity price movements over recent weeks. The AUD normally follows the commodity prices for steel, gold, coal and copper very closely, however RBA statements and safe-haven investment flows into the AUD have out-weighed the normally dominating commodity influence over the Aussie currency value.
The dislocation between the AUD and commodity prices is very bad news for the Australian economy, with mining stocks suffering as profitability is hit hard.
Outside the resources and mining states, the Australian economy continues to suffer badly from the high AUD currency value. Aussie manufacturers are uncompetitive against cheaper imports with carmaker, Ford phasing down domestic manufacturing in Australia.
The race-up in the AUD to $1.0550 appears overdone and exaggerated by thin forex markets in the northern hemisphere vacation period.
Watch for the Reserve Bank of Australia to flip-flop their wording back to an "easing" bias for monetary policy in their quarterly monetary policy statement this Friday. A subtle wording change from the RBA may well be enough to reverse the AUD direction.
The NZD/USD rate appears to have broken above its downtrend line that it has held below over the last 12 months (red line on chart below), whereas the CRB Index is trading just below it (blue line). Lower commodity prices over coming weeks should pull the Kiwi lower.
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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
1 Comments
I dunno Roger, it's getting hard to argue fundamentals in this environment. Ever since bonders were bailed out there has been so much money floating around the system looking for a return distortions of fundamentals have become normal.
I've taken to thinking about it as the tide coming and going (from the USD of course) and it trumps everything in it's wake.
Of course it can't continue in the short term it's quite beyond ridiculous and as you say volumes are thin. As soon as they close out positions down we'll go again.
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