By Roger J Kerr
It was expected that the rapid NZ dollar climb from 0.8100 to 0.8400 a couple of week back due to the "no tapering" (yet) decision by the US Federal Reserve would only be a temporary spike up with a rapid return back down as there was not real change in the underlying respective NZ and US economic directions and the Kiwi buying appeared short-term and speculative.
That expectation has not been fulfilled to date as other factors have come along in the meantime to keep the USD under downward pressure on global FX markets.
The US Government shutdown has not really rocked financial and investment markets to any great extent yet as the situation is seen as only a political stand-off that will be resolved within days.
There have been 17 similar US Government spending shutdowns since 1977 with all resolved within three to 21 days. It just tells the world yet again how archaic and ridiculous the US government mechanisms and political systems are.
The shutdown has naturally been another short-term negative for the US dollar in the currency markets, so there has been no opportunity for the Kiwi to return to 0.8100.
The next market focus is off course the US Government debt ceiling D-Day on 16 October, however this again is nothing new and they always increase the ceiling to avoid credit rating downgrades and investment market turmoil.
While these US political and government processes are disruptive to the NZD/USD view, they need to be regarded as short-term factors that will soon blow over.
There is no getting away from the fact that two important drivers of the US dollar exchange rate value are now moving in the right direction; that is, a much reduced US Government budget deficit due to strong tax inflows from an improving economy and the US external Current Account deficit also dramatically reducing as US exporters are again very competitive in all sorts of global industry sectors.
I still contend that the overall US dollar value, as measured by the USD Index, is on a broad strengthening pathway that commenced in 2012 after eight years of a weakening from 2004 to 2012.
The latest US fiscal and monetary shenanigans have caused some minor, short-term weakness in the USD, however the overall trend upwards from 75 to 90 on the USD Index is still very much on track in my opinion.
What is instructive about the latest bout of USD weakness is that FX markets have not really raced out and bought the NZ dollar aggressively when there have been several very good reasons to do so.
Sky high milk-powder prices, business confidence and manufacturing PMI’s have all been very strong NZD positives over recent weeks; however the NZD/USD rate has been unable to push higher on its own account.
The level of foreign investor demand and interest in NZ has certainly waned since the strong levels earlier in the year when Asian sovereign wealth funds were gobbling up NZ Government bonds and Kauri bonds.
The crash of the AUD in May/June and the crash in merging market currencies more latterly have pegged back foreign investor interest in NZ and the Kiwi dollar.
It is also interesting that the global FX markets do not seem prepared to buy the Euro aggressively against the US above $1.3500 despite stronger Euroland economic data of late and the ECB disappointing the markets by not increasing their monetary stimulus last week.
Once we get past the current negative USD impediments the way should be clear for the global FX markets to re-focus on the long-term interest rate differentials favouring the USD over the Euro and that international currency force returning the NZD/USD rate to below 0.8000 again over coming months.
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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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