By Roger J Kerr
The dominant factor behind the view that the NZD/USD exchange rate will return to trade closer to 0.8000 over coming months, rather than maintain its strength above 0.8500 is the expectation that the US dollar itself will be gaining value against all currencies.
To date, the anticipated USD strength in 2014 has failed to materialise for a variety of reasons, namely:-
- Despite stronger US housing, retail and employment economic indicators over recent months, the Federal Reserve under new Chair, Janet Yellen seem suspicious, overly-cautious and not trusting that the jobs improvement is for real. The slightly more dovish tone from the Fed has delayed yet again the timing of increases in US short-term interest rates to mid-2015 and in turn the expected USD currency strength from higher interest rates is delayed yet again.
- The expected Euro weakness on the back of further monetary loosening policies from the ECB has only just started now as the FX market anticipates announcements at the upcoming the 5 June ECB meeting. The EUR/USD exchange rate is trading back below $1.3700 after flirting with $1.4000 two weeks ago.
- Despite the now inevitable European-style QE (additional and unconventional monetary stimulus) finally being introduced in Euroland, the Euro strengthened over the first four months of 2014 due to capital inflows into Europe from banks selling offshore assets, rising European sharemarkets and the Chinese still diversifying their foreign currency reserves away from the USD.
The USD exchange rate index has clawed its way back to above 80.00 last week (see chart below).
Further gains for the USD are forecast as the Euro weakens ahead of, and after the 5 June ECB monetary stimulus package.
Speculative positioning in the EUR/USD FX market has recently shifted to a predominance of short-Euro positions.
The tide is slowly turning in favour of the USD on the international stage and it is difficult to see the NZD/USD rate moving in the opposite direction.
The local FX market is now expecting that the RBNZ to revise down their current GDP growth and inflation forecasts and set a lower interest rate forward track when they deliver their next Monetary Policy Statement on 12 June.
The attractiveness of the “carry-trade” investment inflows into NZ that has been behind the NZD strength since early March should start to reduce.
The Australian dollar was not sold down as a result of their austere budget last week. However, business and consumer confidence in Australia is expected to decline over coming weeks as the reality of a contractionary fiscal policy sinks in.
The contrast between falling Chinese manufacturing activity and expanding US manufacturing activity will be seen with Chinese PMI and US ISM surveys due for release this week.
A further factor that should cause NZD selling over coming weeks is falling global sharemarkets.
High investor confidence into global equity markets, European sovereign bonds and even high-yield junk bonds in the US seems totally misplaced in the face of the global risks of the Ukrainian situation, credit/property risks in China, unrest in Vietnam and Thailand, faltering BRIC nation manufacturing and the US monetary candy progressively being removed.
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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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