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Roger J Kerr is holding his view that the NZD will revert back to the 67/69 USc range despite recent history. He explains why a decline is still coming

Currencies
Roger J Kerr is holding his view that the NZD will revert back to the 67/69 USc range despite recent history. He explains why a decline is still coming

By Roger J Kerr

For several months now I have been expecting the US dollar to appreciate against the Euro, sending the NZD/USD exchange rate lower as we succumb to the general USD strength on global forex markets. It has just not happened as forecast for many and varied reasons.

Do you now give up on your view and go the opposite way, picking a weaker USD and thus higher NZD/USD rate?

The answer is a resounding NO!

I am more inclined to hold on to the view and live with the frustration that Federal Reserve Chair, Janet Yellen always seems to come with a fresh reason as to why it is not appropriate to increase US interest rates.

The updated currency view is that Janet may be finally running out of excuses as we approach the crucial 21st September Federal Reserve monetary policy meeting. Back in January it was global equity market volatility as a result of the oil price collapsing and worries about the Chinese economy that caused Janet to hold off. In March /April it was concerns that US economic data was weaker than expected. In June it was the Brexit vote and what volatility that would cause on global markets. The post Brexit volatility lasted about three days and the UK sharemarket has been the best performing compared to peers over the last two months.

To be fair to Janet, US economic data has been inconsistent all year, with stronger data followed by bouts of weaker numbers. However, employment growth in the US through June and July was very strong, so if the August Non-Farm Payroll figures (released Friday 2 September) are well above a 200,000 increase, the markets will increase their bets again that the Fed will lift interest rates on 21 September.

If the Fed do not increase in September, they will wait until their December meeting, after the US Presidential election in November. Last week two non-voting (however influential) Federal Reserve Governors expressed the view that the markets were under-anticipating the next Fed rate hike.

All financial market participants will be reading between the lines of every word that Janet Yellen delivers this Saturday at her speech at the central banker’s annual jamboree at Jackson Hole, Wyoming. Watch for USD strength in the lead up to and after that speech as Janet struggles to find any new reasons not to increase US interest rates. One fundamental reason as to why the Fed must increase rates is that if they do not get their interest rates higher now they will have no room to reduce rates later on if the US and global economy suffer a shock that requires a Fed monetary loosening response.

The US dollar has weakened back to $1.1300 against the Euro, maintaining its $1.1000 to $1.1300 trading range over recent months. Looking ahead at the Fed’s likely signals and decisions over the next month, my strong view is that the EUR/USD will head back the other way to below $1.1000, pulling the NZD/USD rate below 0.7000.

It is very instructive to me that the Kiwi dollar has not been able to push higher above 0.7300 over recent weeks, despite the dramatic spike higher in dairy prices and a weaker USD over this period. Hedge fund traders are clearly not prepared to buy more Kiwi dollars at 0.7300, they become sellers at this point. Negative credit ratings news from Moody’s late last week for the Aussie banks saw the AUD/USD move sharply lower to 0.7600. The resultant jump back up in the NZD/AUD cross-rate to 0.9540 does not look sustainable, the cross-rate has a pattern of gains to 0.9500/0.9600 turning out to be very short-lived. We may see some foreign investors selling out of the NZ sharemarket over coming weeks if profit results do not beat the exaggerated expectations built into current share prices. The NZD/USD uptrend from 0.6300 to 0.7300 over the last 12 months is running out of momentum, a correction back to the 0.6700/0.6900 area is now due.

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Roger J Kerr contracts to PwC in the treasury advisory area. 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

Another reason the US Fed has not increased the interest rate, is that the US government then cannot afford to service the loans they generated to bail out all the banks

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