By Roger J Kerr
Forecasts from local banks two weeks ago were that the Kiwi dollar was headed to 0.8600 and 0.8700 because our economic story was just so compelling relative to others.
I think the bank forecasters conveniently omitted to mention that the dominant driver of day-to-day NZD/USD change is in fact AUD/USD currency movements.
It was hard to see the Kiwi dollar making such gains when the Aussie was failing to make gains on normally positive news.
The AUD failed to appreciate despite higher iron ore prices and stronger Chinese economic data in January.
Last week, the AUD again failed to attract any upward traction despite RBA Governor Glenn Stevens stating the obvious that the Australian economy has already received considerable monetary stimulus with the interest rate cuts last year.
The RBA is now awaiting the positive household/consumer response to all that stimulus. If Australian retail, employment and housing data does not pick up over coming months, Governor Glenn will need to re-think and cut official interest rates again.
Not much in the way of Aussie economic data this week, however plenty for the FX markets to ponder next week.
To be fair, the NZD has outperformed the AUD against the USD over recent weeks, pushing the NZD/AUD cross-rate above 0.8100. However, that increase is entirely consistent with the interest rate differential closing up between the two currencies - that is, Aussie rates likely to be cut again and NZ interest rate market forward pricing reversing from cuts to increases.
Here at home, Governor Wheeler did indeed become more emphatic last week around jawboning the high NZ dollar down.
While the use of macro-prudential instruments (or the threat to use them on the bank lenders) would only impact on the currency value “at the margin”, the fact that interest rates may not have to increase when they normally would in response to a hot property market, was sufficient to deter Kiwi dollar buyers.
The RBNZ do confer with their Canadian counterparts on matters such as monetary policy settings, asset price bubbles, inflation control and macro-prudential measures to control the former. The Canadians recently tightened up on credit conditions in their economy through bank ratios and played down expectations of future interest rate increases. The net result was a sharp fall in the Canadian dollar against the USD from $0.9850 to $1.0230.
As the chart below shows the Canadian dollar does track with the Kiwi and Aussie against the USD as it is also regarded as a commodity/global growth currency.
The CAD has broken out of its previous tight trading range through November to January to the downside, suggesting the NZD/USD rate has some catching up to do.
Add in some potential upcoming global equity market volatility as event risks in Europe and the US come back on the radar screen (Italian political ructions and US Government spending cuts) and the market prognosis is that we may well see 0.8100 instead of 0.8700.
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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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