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Roger J Kerr reminds us that the demand to invest into NZ’s higher yields dissipates quickly if the currency ceases to appreciate and starts to depreciate

Currencies
Roger J Kerr reminds us that the demand to invest into NZ’s higher yields dissipates quickly if the currency ceases to appreciate and starts to depreciate

 By Roger J Kerr

Over the past two weeks week the Kiwi dollar has recoiled nearly two cents lower from its highs of 0.8740 reached on 10 April.

There is not yet a major reversal in market sentiment towards the Kiwi; however it again tells us that the speculative players in the currency are not that willing to be aggressive buyers of the Kiwi dollar at the higher echelons.

The Kiwi has also under-performed the AUD over this past week with the NZD/AUD cross-rate falling away to below 0.9200.

We may finally be witnessing the unwinding of speculative long NZD/short AUD FX market positions that I expected to see a couple of months back.

Perhaps it has taken the 22% drop in Wholemilk Powder prices to trigger a re-rating of the NZD value vis-à-vis the AUD against the USD.

The plunge in technology stocks in the US has not developed into a full-scale equity market sell-off and markets have settled over recent days. However, there is still a stack of market, economic and geo-political risks circling around the world in the form of Russian intrusions into the Ukraine, doubts over China’s 7.4% annual growth rate and the growing likelihood of the ECB embarking on their own “Quantitative Easing” monetary stimulus package.

They all add to a stronger USD in my view.

The speculative buying and selling of the Kiwi dollar will influence short-term, day-to-day movements; however at the end of the day it is the permanent capital inflows and outflows that really determine the NZD/USD value over the medium to longer term.

In this respect it is interesting to note that one of the largest investment fund managers in New Zealand, AMP is signalling that it is timely for them to allocate more funds to offshore investment markets, taking advantage of the post-float record high in the Trade Weighted Index.

Other local fund managers will be reducing their hedge percentages (i.e. selling NZD) on offshore investment portfolios. On the other side, there is no real indication yet that retail and wholesale (sovereign wealth funds) Asian investors into New Zealand bonds are pegging back their demand.

However, as we have seen before, the demand to invest into New Zealand’s higher yields dissipates quickly if the currency ceases to appreciate and starts to depreciate.

While the Kiwi has under-performed the AUD over recent times, the daily movements of the AUD/USD exchange rate still remains as the dominant influence over NZD/USD changes.

My view is that the gains in the AUD against the USD from below 0.8900 to 0.9400 were speculators unwinding massive short-sold AUD positions when it failed to depreciate to 0.8500 a few months back. That buying back of AUD positions has now largely run its course and future AUD/USD direction from current rates 0.9325 will focus back on economic data releases and the Australian Federal budget on 13 May 2014.

Readers will recall that the a blow-out in the Australian budget deficit 12 months ago triggered the major sell-off in the AUD exchange rate.

The financial markets will not be so surprised this year, however the budget from Treasurer, Joe Hockey will be in the “austere” category and hardly positive for the Aussie economy or the AUD. 

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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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2 Comments

Confirming that the NZD is influenced by global factors and large investors/traders more than any real nz economic fundamentals.

Now why is NZ the only developed country in the world hiking rates? Where did this order come from?

And when will the OCR be cut? Another few hikes before commonsense and consequences will force a reversal perhaps.

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Hopefully it doesnt take another earthquake to force rbnz to see sense.

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