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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