By Roger J Kerr
Two months ago a rising Dow Jones Index and higher wholemilk powder dairy prices (as we witnessed last week) would have pushed the Kiwi dollar higher in global forex markets.
It is highly instructive that the NZD/USD exchange rate in fact dropped last week, falling below key support levels as it did so.
The drivers of NZD/USD exchange rate direction have changed with the Kiwi finally succumbing to the general US dollar strength we have seen against the Japanese Yen and UK Pound over recent weeks/months.
The “big” dollar (USD) is certainly on the comeback trail in international FX markets after years in the doldrums pre and post the GFC.
Adding to the downward pressure on the Kiwi over recent weeks has been:
· A sluggish AUD against the USD due to generally weaker than expected Chinese economic data.
· The local moneymarkets pricing-out interest rate increases after Governor Wheeler highlighted the potential use of the alternative macro-prudential monetary tools to slow up the bank lending/housing market.
· The risks surrounding the NZ economy, as one big farm of an agricultural production, increasing as the North Island summer drought lifts in intensity and rural incomes and spending wither like the grass under the sun. GDP growth forecasts for 2013 are being wound-back.
The strong increase in employment growth in the US is broad-based across their economy (construction, services, retail and financial sectors). The February job statistics released on Friday confirm jobs expansion of greater than 200,000 per month over the last six months is no flash in the pan.
All the markets, including the FX market, are now re-assessing the likely timing of when the Federal Reserve will meet their 6.5% unemployment rate pre-condition and start to phase out of the QE monetary stimulus.
Fed Governor Ben Bernanke might take some more convincing to bring forward the timing, however continuing strong US economic data will lead to a stronger USD exchange rate as the money printing comes to a end and US market interest rates increase.
The New Zealand productive/export sector badly needs a stronger USD on global currency markets to send the NZD/USD rate back below 0.8000. How much below 0.8000 the NZD/USD could travel really depends on how much further the USD can strengthen against the major currencies of JPY, GBP, AUD, CAD and EUR.
The USD has already recorded substantial gains against the JPY and GBP since 1 January; the others, including the Kiwi dollar have some catching up to do.
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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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3 Comments
The strong increase in employment growth in the US is broad-based across their economy (construction, services, retail and financial sectors). The February job statistics released on Friday confirm jobs expansion of greater than 200,000 per month over the last six months is no flash in the pan.
I wouldn't wager the farm on that: From CEPR
The unemployment rate fell to 7.7 percent, but this drop was largely attributable to a decline in labor force participation. The employment-to-population ratio (EPOP) was unchanged at 58.6 percent, exactly the same as the rate in February of 2012 and just 0.4 percentage points above the low hit in the summer of 2011. This compares with an EPOP of 63.0 percent in 2007. The 54.8 percent employment-to-population ratio for women is just 0.2 percentage points above the low hit last month.
The decline in labor force participation in this cycle has been striking. While the unemployment rate has dropped more than 40 percent of the way back to its pre-recession level, the employment-to-population ratio is still far closer to its trough than its pre-recession peak.
The 236,000 new jobs reported for February are a good sign and better than generally expected, but there is the risk that this is being driven by unusually good winter weather. This could lead to a situation like we saw last year with very weak job growth in the spring as the result of hiring being pulled forward. This is basically a picture of an economy that is showing modest growth, but has not yet felt the impact of the end of the payroll tax cut and the sequester.
Weakening NZ$ ?..... This is wishful thinking at best , there is no case to be made for a weakeing NZ$ in the short term.
We still have forex inflows from CHCH re- insurance payouts , and now we are going to float our State Owned Enterprises , more forex coming in , and lo and behold WESPAC economists are picking increased interest rates in 2014 ...... more hot money flowing in .
My concern remains the strong NZ$ to Aus$, this is a real cause for concern and is hammering exporters right at this moment quite severely .
I suspect this will not end well for us unles we front - foot the problem
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