By Roger J Kerr
Over recent weeks it appeared that the Kiwi dollar has been holding its own in the 0.7700 to 0.7850 trading range in the face of a weakening AUD and stronger USD.
However, a stronger than expected 195,000 US jobs increase for June, released on 5 July, has the Kiwi once again under some pressure at the bottom end of that range.
The direction of the USD against all the major currencies will determine the near term NZ dollar direction.
Following the strong US employment data the US dollar made impressive gains against the Euro, Pound and Japanese Yen. Positive US economic data is now propelling the USD currency value up as the forex markets anticipate eventual rising US interest rates after the Federal Reserve phase down their QE monetary stimulus.
It was expected that the Euro would weaken below $1.3000 against a gaining USD; however comments from the European Central Bank this last week that they will hold their interest rates lower for longer has assisted and confirmed that change.
The EUR/USD is trading lower at $1.2800 and this is one reason the NZD/USD rate has fallen away to 0.7700.
Much of the discussion and commentary in the local New Zealand media and bank fraternity about the value and future direction of the NZD against the USD centres entirely on New Zealand economic conditions and outlook.
They are looking at the wrong sources.
It was clearly evident that why the NZD/USD spent so much te above 0.8000 in recent years was largely due to a weak USD on the global stage, not necessarily positive NZD factors. Local commentators and analysts were slow to recognise the dominance of the USD side of the currency pair.
International investors not wanting to be overweight in USD assets when the USD was weak sought out and invested into growth/commodity currencies like the NZD and AUD. We were seen as a safe haven alternative currency to be in with 4% interest return yields to boot.
Now the global currency environment has changed dramatically with the USD on a major trend higher and global investors pulling funds out of emerging markets and peripheral currencies. Again the international forces are determining the NZD/USD direction and sending the Kiwi dollar down despite the local economic performance being the best it has been for quite some time.
Two long term lead-indicators and drivers of the NZD value, domestic house prices and the terms of trade, are both suggesting a strong NZ dollar value currently.
House prices have increased 10% over the last 12 months and the current supply/demand imbalance points to a similar such increase over the next 12 months.
The FX markets will in time recognise the inevitable that NZ short-term interest rates will have to increase in 2014, well ahead in time of increases in the US short-term interest rates.
The elevated export prices look set to continue with global Wholemilk Powder market supply and demand equations favouring NZ dairy farmers in to 2014.
These two critical drivers of the NZ economy are setting the economy on a very positive growth path over coming years.
It appears increasingly likely that while the USD itself may continue to strengthen against the Euro, Pound and Yen, the NZ dollar will gain some support from the two aforementioned positive variables. It may mean a slightly lower NZD/USD rate to 0.7500/0.7600 for a short period; however the Kiwi dollar out-performing other currencies against the USD will result in significantly higher cross-rates from here against the Euro, Pound and Yen.
We have already witnessed the spectacular NZD gains against the Australian dollar to above 0.8500 over recent weeks as NZ interest rates and soft commodity prices increase whilst the outlook and trend of Australian interest rates and hard commodity prices move in the opposite direction.
The greater probability of the NZD/USD trading range over the next 12 months is that it will spend more time in the 0.7500 to 0.8000 region than outside that five cent range.
The AUD is expected to stabilise above 0.9000 to the USD as all the global traders and hedge funds who had funds in Australia over recent years have now largely exited the currency. The decline from $1.0500 to 0.9000 over recent weeks has been rapid without any real correction to date. However, it will require stronger than expected Chinese economic data to materialise over coming months for the AUD to find some support in global foreign exchange markets.
Northern hemisphere summer holidays should see reduced forex market volumes and position taking over coming weeks with the markets more likely to take a breather after the wild volatility in May and June.
Investment markets globally are slowly adjusting to the prospect of the US Federal Reserve taking away the candy they have been addicted too over recent years.
The NZ dollar does look set to continue to hold its own against a rising USD, resulting in a generally stable NZD/USD rate, however higher on all the other cross-rates.
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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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