By Roger J Kerr
How the local forex market will react to the 0.25% OCR increase this Thursday is the debating point this week.
The Kiwi dollar has had a strong run up to highs of 0.8520 (Friday night before the stronger than expected US jobs data which was positive for the USD) since the lows of 0.8060 in late January when the RBNZ did not change the OCR.
It does appear that the strong long-term resistance around 0.8500 for the NZD/USD rate will prevail once again as the weather-beaten US economic data recovers and Chinese economic releases disappoint.
I doubt that the speculative participants in the NZD currency market will go into Thursday’s MPS announcements overly long NZD’s in anticipation of further gains from 0.8400 to over 0.8500. The USD itself has made decent gains against the Japanese Yen to 103.00 since the 175,000 employment increase for February; however we have yet to see the USD gains against the Euro.
Australian economic numbers have generally been more encouraging over recent weeks; however there is always a sizable lag with employment improvement following an overall economic recovery.
Widely publicised job losses in various Australian industry sectors will continue of some months yet, even though some of the more forward-looking economic indicators suggest a pick-up in activity levels. Australian jobs data is also due for release on Friday with prior forecasts of a 3,700 reduction in the month of February.
RBA Governor Glenn Stevens did not want to comment too much on the AUD exchange rate level on Friday, other than to say that above 0.9000 is higher than what they would want. The RBA have to be somewhat careful as a much lower AUD/USD exchange rate would push up inflation which is already at 2.7% and at the top-end of their 2% to 3% target band. A weaker Yen and poor Chinese data over the weekend suggest a continuation in the AUD/USD pull-back over coming days to below 0.9000 (currently 0.9030).
The New Zealand moneymarkets and currency markets have already fully priced-in a 0.25% increase in the OCR this Thursday.
All the NZD buying on the rumour has already occurred, reaction to the fact is likely to be muted. Governor Wheeler is still waiting for the stronger US economic data to be reflected in a stronger USD on global currency markets and thus a lower NZD/USD rate that allows him to increase interest rates without pounding the export sector.
To date, the RBNZ have been frustrated by the USD Index drifting lower to 79.60 instead of appreciating towards 85.00 as the US economic fundamentals would suggest.
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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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