By Roger J Kerr
All the normal indicators point to a lower NZSD/USD exchange rate, so why is it not going down?
The USD is stronger against all the major currencies, except the Euro and that should fall from $1.3000 when the ECB cut interest rates.
Commodity prices are falling in response to lower global growth outlooks and weaker than expected Chinese economic data.
Two unrelated factors appear to be holding the Kiwi higher right now than what it would normally be given the aforementioned variables and the “risk-off” sentiment in global financial/investment markets over the last week:
1. The strong domestic housing market trends prompted Deputy RBNZ Governor Grant Spencer to warn of potential interest rate increases earlier this year than what most expected.
Grant’s boss might poor a bit of cold water on that expectation this Wednesday at the OCR review.
2. Capital inflows coming in, not only into NZ Government Bonds, but also a record volume of new issue Kauri Bonds so far this year. Kauri Bonds are prime non-resident borrowers issuing debt securities denominated in NZD’s and swapping the debt to what currency they want.
The investors have to buy NZD’s to buy the bonds. NZD2.9 billion has been issued in the first three months of 2013 and in recent weeks both the Asian Development Bank and Export Development Canada have both increased their issue amounts such has been the demand.
We might think that 3% bond yields are real low; however others around the world like that return on a currency that has performed pretty well over recent years.
However, despite these positives for the Kiwi we ultimately always follow the Aussie dollar and it is getting harder and harder to list the positives for the AUD going forward.
As the chart below shows, the AUD/USD rate is moving progressively towards a crunch point as the $1.02 to $1.06 trading range it has stayed within for the last nine months cannot hold forever.
A break below $1.0180 over coming days/weeks looks set to trigger a whole lot more stop-loss selling of the AUD.
Open futures contracts in the US on both currencies tells us that the speculators are very long NZD, however they have considerably reduced long AUD positions over this last week.
The Kiwi appears vulnerable to a major AUD sell-off.
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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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1 Comments
Capital inflows coming in, not only into NZ Government Bonds, but also a record volume of new issue Kauri Bonds so far this year. Kauri Bonds are prime non-resident borrowers issuing debt securities denominated in NZD’s and swapping the debt to what currency they want.
Hmmm - is it not the case the FX markets are a price precursor or discount mechanism of perceived forward events.
Kauri bonds, yes prior issuance was high, but the latest data releases show a net payback for April month end.
NZ Government Stock - on the 15th April 2013 did the DMO not redeem a net ~NZD 4.066 bn of stock.- leaving ample KIWI in the bank float for future issuance. This does not count the NZD 5.054 bn amount the RBNZ pumped into the market over six months to smooth the redemption of the 2013 issue.
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