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Roger J Kerr says all the Reserve Bank's statements in recent times have sent the Kiwi dollar higher rather than lower - as the RBNZ supposedly wants

Currencies
Roger J Kerr says all the Reserve Bank's statements in recent times have sent the Kiwi dollar higher rather than lower - as the RBNZ supposedly wants

By Roger J Kerr

The Kiwi dollar has once again made gains against its Australian counterpart as a result of the RBNZ missing another opportunity to take overt action to send the NZD lower to back up their consistent rhetoric about the need for a lower currency value. The markets (as well as our Finance Minister) clearly expected the RBNZ to tweak the macro-prudential bank lending tools at last week’s Financial Stability Report to temper the residential property market boom.

The RBNZ disappointed the markets with only a limp “we are monitoring the situation closely” statement. The result was a rising NZ dollar.

The expectation was that further mortgage lending controls would pave the way and allow for another 0.25% OCR cut on 9 June.

If the RBNZ truly desire a lower exchange rate value they are sure going about it in a funny way.

All their statements over recent times seem to propel the NZ dollar up instead of down!

The RBA in Australia have been much smarter with their monetary policy management recently and their FX market ambush a fortnight ago (surprise OCR cut) was the catalyst that has driven the AUD/USD exchange rate down over five cents from 0.7800 to 0.7250.

The resultant lift in the NZD/AUD cross-rate to 0.9330 however does not look sustainable in the medium term against the interest rate differential lead indicator that points to 0.8700 (refer chart below).

The NZD/USD rate has a lot of catching up to do on the AUD/USD fall, therefore expect to see heavy speculative selling of the NZD against the AUD over coming weeks. That independent NZD selling should send the NZD/USD back to the 0.6500/0.6600 region.

Looking ahead over the next few weeks, two key NZ-centric announcements should also generate independent NZ dollar selling forces in the forex markets:-

  • Fonterra’s milksolids payout forecast for the next 2016/2017 dairy season before the end of May.  At current wholemilk powder prices and exchange rate levels (outside of Fonterra currency hedging) the forecast payout is not going to be very pretty for an industry that is coming off two years of dairy farmer losses and negative cashflows. A milksolids payout forecast well below $5/kg for a third year in a row is the sort of negative news for the whole economy that will not go unnoticed by offshore investors in the NZ dollar.
  • The RBNZ’s Monetary Policy Statement on 9 June. Whilst a major Australasian bank is now calling for a “no OCR cut” decision on 9 June, the RBNZ know they are under increasing pressure not to do anything that will send the NZ dollar higher and damage the dairy industry further. Both the Government and the RBNZ are well aware that other policy initiatives are required to control the housing market boom. Therefore, an OCR cut is desperately required to depreciate the NZD to lift our largest industry out of its current hole.

My expectation is that a combination of a stronger US dollar in global markets and the aforementioned separate NZD selling pressures will provide the impetus to push the NZD/USD rate south to 0.6500. The FX markets will price-in these events in advance.  At the 0.6500 level USD exporters need to load up on forward hedging as the potential for increasing dairy prices later in the year may well have the Kiwi dollar back above 0.7000 in 2017.

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Daily exchange rates

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Source: CoinDesk

 

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

While NZ maintains its (relative) high interest rate policy, then we can expect a high NZ dollar.
The data- driven organisation can easily be mislead by the 'data' when the rules of the game have radically changed. The RB keeps expecting inflation to reappear, & cannot admit that it will be impossible to raise interest rates for some time.

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