By Roger J Kerr
The Kiwi dollar is now testing the bottom-end support area of its long-established 0.8200 to 0.8500 trading range against the USD.
Having failed to hold on to gains above 0.8500, the market sentiment and direction has significantly changed to a more negative tone.
However, there is major resistance and buying interest for the Kiwi between 0.8150 and 0.8200 with local exporters lifting hedging percentages which were run lower while the NZ dollar was trading above 0.8400.
Global foreign exchange market forces and events could well cause a test of the 0.8150 support level over coming weeks.
What has changed over the last two months is that stronger US economic data is behind a general strengthening of the US dollar against all currencies and there not really any local positive factors to offset that impact.
The probability is increasing that the NZD/USD exchange rate could well spend some time below 0.8000 over coming months as the negative influences start to gain more prominence.
The impetus to a lower exchange rate level is not just coming from offshore variables, the following local developments have to be considered as negative for the Kiwi dollar as well:
- The summer drought is proving to be far more severe on agricultural production as each week goes by, thus overall GDP growth numbers are going to be hit later in the year. A lower growth outlook removes one of the Kiwi dollar positives of relatively superior economic performance compared to other economies/currencies.
- RBNZ Governor Wheeler’s jawboning down of the exchange rate has been more effective of late with interest rate increases now effectively ruled out for 12 months, despite the housing market and domestic spending starting to ramp up. Last week’s Monetary Policy Statement being interpreted by the financial markets as more “dovish” than expected.
- The Overseas Trade balance is firmly in deficit now with the extended period of NZ dollar strength hurting exporter competiveness and driving higher import activity. The overall Balance of Payments deficit is set to deteriorate further as foreign-owned companies operating in the NZ domestic economy producing increased profits, thus higher dividend liabilities owed to foreign entities increasing the deficit.
- At some point soon credit rating agencies like Standard & Poor’s are likely to comment on New Zealand’s weaker Balance of Payments situation, on top of the lower agricultural production potentially leading to the Government falling short of its balanced internal budget objective by June 2015. Economies running duel deficits are always more at risk to downgrade unless the outlook is improving on the income generation front.
In the very short-term, the Kiwi dollar could be volatile up and down ahead and after two key economic releases this week.
The Balance of Payments Current Account data on Wednesday 20 March may cause NZD selling if the deficit is greater than the 4.9% of GDP prior forecasts.
However, the GDP growth figures for the December quarter to be released on Thursday 21 March may well surprise on the upside as most of the components that make up overall economic activity suggest a quarterly increase above 1.0%. A GDP number well above consensus forecasts would grab headlines on the day, even though the drought has been much more negative for the economy since December 2012.
In the medium term, the direction of the AUD and EUR against the USD will be more influential on NZD direction.
The AUD gained on the much stronger than expected jobs increases last week, however yet again the AUD gains do not appear to have been sustainable.
General Australian business confidence is not that healthy, the jobs surprise maybe more to do with the sample survey changing than real employment growth.
The Euro has briefly traded above $1.3000 against the USD again, however the political, financial market and economic outlook in Europe remains uncertain and thus further Euro weakness $1.2500 appears muck more likely over coming months.
The NZD/AUD cross-rate pulled back sharply from 0.8100 to 0.7900 when the Kiwi was sold down on its own account following the RBNZ statement.
Interest rate differentials between the two currencies still suggests that the cross-rate will eventually lift toward 0.8500, however the upward path is never a smooth one.
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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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