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Roger J Kerr says the Kiwi dollar now likely to test the bottom end of its trading range

Currencies
Roger J Kerr says the Kiwi dollar now likely to test the bottom end of its trading range

By Roger J Kerr

The NZD/USD rate has again flirted with the top end of its current trading range at 0.7700 and yet again it has run into a very large wall at those higher levels and rapidly retreated to 0.7530.

Since the depreciation of the NZ dollar to the low 0.7000’s in January every attempt by the FX markets to push the Kiwi back up above 0.7700 has failed.

The major resistance tells us that the offshore speculators in the NZ dollar are not prepared to buy and hold the currency at entry points above 0.7600/0.7700.

Whilst NZ GDP growth rates and interest yield returns are still well above other economies at this time, which support the NZ dollar currency value, there are no enough risks circling around to cause some caution from the currency traders.

As expected, last week’s OCR review commentary from the RBNZ was sufficiently “wordsmithed” to ensure the financial markets interpreted the statement as more dovish than most were expecting.

The RBNZ achieved their aim to jawbone the NZD/USD rate one cent lower in reaction to the statement.

The media headlines concentrated on the prospect of the next move in official New Zealand interest rate being downwards.

However, such action by the RBNZ is highly qualified and dependent on the demand slowing in the economy and wages/prices decreasing.

It is almost impossible to see that happening over the next 12 months, so the probability of an OCR cut remains remote in my view.

However, that does not mean that the NZD/USD exchange rate does not spend some time now in the bottom end of its trading range.

Speculative investors who were long NZ dollars against the Aussie dollar continue to unwind their positions.

Therefore the NZD can be expected to underperform the AUD against the USD as iron ore price continue to improve and dairy prices head the other way.

The only caution against this scenario is if the RBA make a surprise cut to interest rates this week. Improving Australian economic data and the recovery in mining commodity prices suggests that the RBA will hold off on a cut once again.

The US dollar itself has weakened back against the Euro from $1.0600 to $1.1200 over the last couple of weeks as weaker than expected US consumer confidence and manufacturing data has caused some to push further back the timing of US interest rate increases in the second half of 2015.

The short-term Euro recovery/USD weakness to $1.1200 is not expected to last too long, therefore a stronger US dollar from its current level over coming weeks/months should aid a push to a lower NZD/USD rate in the 0.7400/0.7300 area.

The recent gains in the NZ dollar to 0.7700 were at odds to the continuing decline in dairy prices over the last six weeks.

Wholemilk powders (WMP) price recovered up to USD3,300/MT in February when it appeared that the summer drought would reduce supply.

However, the rain has returned and overall milk production throughout New Zealand has not decreased on the previous year.

Coupled with increased European WMP supply onto the globally traded dairy market, WMP prices have fallen away again over the last three Fonterra GDT auctions.

Lower dairy, forestry and meat prices are now reducing the Terms of Trade Index. The close historical correlation of the overall NZD value, as recorded by the TWI Index and the Terms of Trade Index (import and export prices) suggest that the TWI should depreciate from the current 78 level (It was above 80 last week) to below 75.


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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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1 Comments

Roger, What's your outlook for the EURO/NZ cross?

Holiday time!

SK

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