By Roger J Kerr
As expected, the NZD/USD exchange rate was volatile last week with the strong GDP growth numbers on Thursday pulling the Kiwi dollar upwards again from its key support level around 0.8200.
Recoveries in the AUD and EUR against the USD over recent days have helped that recovery.
The Kiwi may have also gained some support as a safe haven place to go with the uncertainties surrounding Cyprus in Europe and the potential precedents and knock-on contagion implications for the rest of Europe.
We await news this morning as to whether the Russian depositors are going to bail out the Cypriot banks.
My reading of the historical December quarter’s GDP result was that the newswire’s headlines of a 1.5% increase against prior forecasts of 0.8% was always going to cause short-term NZ dollar buying.
However, the reality of the drought on our economic growth this year would not see that Kiwi buying be too long lasting.
Therefore, the move back above 0.8300 appears temporary and thus a good opportunity for USD importers to ensure they are at their desired forward hedging levels for USD payments over the rest of 2013. Overseas trade import/export figures on Tuesday for the month of February will be a reminder to the FX markets that the high NZD value is hurting our export sector in terms of competitiveness and thus export volumes.
A monthly trade deficit well above $300 million is expected which will further increase the overall annual trade deficit.
We still see stronger US economic data over coming week/months being interpreted by the global currency markets as being positive for the USD against the major currencies.
If the Cypriot Government cannot get a deal today/tomorrow to save their banks, the Euro will weaken back to the $1.2800 level against the USD and thus drag the Kiwi down with it.
Despite the now more subdued economic outlook for New Zealand this year due to the drought, our economy and currency is still regarded by international investment funds as a relative secure and safe place to have their money away from the uncertainties in Europe.
One of the largest US funds, PIMCO have confirmed that they have increased their asset allocation to NZ Government Bonds over recent years by US$3 billion and they remain keen to allocate more our way.
While a stronger USD does suggest that the Kiwi may trade marginally below 0.8000 for a period this year, our still superior relative performance to most other OECD economies is well recognised around the world and underpins the NZD currency value. It would seem that only a dramatic collapse of wholemilk powder prices could cause independent NZ dollar weakness into the low 0.7000’s.
Looking at the global demand and supply situation over coming years for quality export milk powder products that scenario seems totally unlikely.
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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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