By Roger J Kerr
The positive and negative forces that clash every day and week, and which determine the NZD/USD exchange rate direction, are about to be tested for collision impact and damage once again as both domestic and international economic news causes market shifts both ways.
Over recent weeks, while there has at times been extreme daily volatility up and down, the overall established trading range between 0.7700 and 0.8200 has held firm.
Depreciating emerging market currencies, the contaminated milk fiasco and LVR announcements all pushed the Kiwi dollar to the bottom end of the range.
However, a weaker USD, a rebounding AUD post-election and a more hawkish than expected RBNZ monetary policy statement last week have driven the currency higher.
Generally, the Kiwi dollar has outperformed other currencies against the USD over this recent period, as reflected in the TWI Index rising from the 75.0 area to a current level of 76.9.
Fed influencers
The range-bound volatility is not about to subside anytime soon as the markets price ahead of and react to the US Federal Reserve monetary stimulus/bond buying tapering decision this week.
The Fed announcement hits the markets at the same time as New Zealand GDP growth figures for the June quarter are released on Thursday 19 September. Marginally weaker than expected US jobs and retail data over recent weeks may suggest that the Federal Reserve is a little more cautious towards the rate at which they remove the monetary candy from the markets/economy.
The US$ 85 billion per month programme of bond buying may only be reduced by US$ 10 billion per month instead of the US$ 15 billion the markets have been expecting since Chairman Bernanke signalled the upcoming change back in May.
The USD will strengthen against all currencies if the tapering decision is the full US$ 15 billion with a reduced currency market impact if the tapering is for a smaller monthly amount.
NZ drivers
Locally there is much speculation and differing forecasts as to the impact of the summer drought on dairy and meat agricultural production contained within the June quarter’s GDP numbers.
The RBNZ forecast of +0.40% for the quarter is now at the upper end of economist forecasts as both agricultural and construction data has proven to be weaker through that three month period.
A negative GDP result for the quarter would certainly put question marks around New Zealand’s superior economic performance and cause the Kiwi dollar to be sold off.
The newswire headlines from a potential contraction in growth would be sufficient to pull the NZ dollar on its own accord.
Looking forward, the mild winter weather has allowed a rapid recovery for farmers from the drought and all other areas of the economy are on a very positive upward trajectory.
The net result on the NZ dollar of these upcoming economic announcements may well be the negative of the GDP offsetting the positive from a weaker USD as the Federal Reserve hesitate or delay on the tapering decision.
A continuation of the 0.7700 to 0.8200 trading range appears far more likely than a decisive break out the top or bottom rate levels.
Aussie influences
As expected, the Australian dollar has appreciated once the general election was known with certainty.
Large Australian mining and resource companies were holding back from investment decisions until they knew for certain that the carbon/mining tax was gone.
Unsurprisingly, business and consumer confidence has increased in Australia once the change of Government was close to being certain.
The race up of the AUD to 0.9350 from below 0.9000 against the USD was arguably too rapid and ahead of itself. Over recent days the currency has corrected back to 0.9260 on weaker than expected August jobs figures.
The AUD/USD swings combined against the NZD specific forces have resulted in wild gyrations in the NZD/AUD cross rate of late.
The NZD/AUD cross-rate fell to a low 0.8580 on 6 September, however recovering strongly to 0.8790 on the RBNZ MPS positive for the NZD and weaker jobs numbers pulling the AUD back last week.
The NZD/AUD rate does seem destined to remain within a 0.8600 to 0.8850 trading range over coming months as the current 0.70% gap between the respective 2-year interest rates (NZ = 3.55%, Australia = 2.85%) is expected to remain stable.
The interest rate differential continues to be a very accurate predictor and lead-indicator for the NZD/AUD cross-rate.
New Zealand interest rates marginally above those of Australia is more the norm for all sorts of market size and economic reasons.
The period from 2009 to 2012 when NZ interest rates were well below those of Australia was the abnormal period.
Therefore local exporters in AUD’s should not be expecting any return in the cross-rate to the sub-0.8000 level they enjoyed though the abnormal relative interest rate period.
The AC effect
Should the New Zealand syndicate win the America’s Cup yachting regatta the euphoria and psychological boost to the nation would have to be viewed as a short-term positive for the Kiwi dollar.
Longer-term, a stronger US dollar currency value on the global stage as their monetary stimulus is removed should keep the NZD/USD rate below 0.8000.
-----------------------------------------------------------
To subscribe to our daily Currency Rate Sheet email, enter your email address here.
No chart with that title exists.
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
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.