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Roger J Kerr says the Kiwi dollar should now come under downward pressure from a resurgent American currency

Currencies
Roger J Kerr says the Kiwi dollar should now come under downward pressure from a resurgent American currency

By Roger J Kerr

Finally, it seems the US Federal Reserve will belatedly come to the rescue of RBNZ Governor Graeme Wheeler and a stronger US$ exchange rate will assist in the quest to return New Zealand’s inflation rate to the required 1% to 3% band.

The very clear signal from the Federal Reserve Chair, Janet Yellen at last weekend’s Jackson Hole speech was that US economic conditions have improved to the point that a 0.25% interest rate increase is very much “in play” for the 21 September Fed meeting.

Under the proviso that US jobs expand for August by greater than 180,000 on 2 September, the probability of a Fed hike in September will increase to above 50%. The FX markets should now price the US dollar stronger against all currencies in the lead up to the August jobs figures and 21 September Fed meeting. Rising US interest rates against money printing monetary policies in Japan and Europe underpins the next phase of anticipated US dollar strength.

Already the US dollar has made gains against the Euro after the Yellen signal from $1.1300 to below $1.1200. Further US dollar gains have to be expected over coming weeks against the major currencies, as well as Asian and emerging market currencies. In this environment the NZD/USD rate should come under increasing downward pressure to below 0.7200 and eventually 0.7000, as it depreciates in line with all other currencies against the resurging USD. 

As was expected, Janet Yellen has finally run out of excuses not to increase US interest rates. All year she has managed to find a new reason not to raise rates. However, now consistently stronger US economic data (especially employment) is outweighing global financial market volatility and lower oil prices that have kept US inflation at lower than expected levels. The markets are now stable and oil has stabilised at a higher US$40 to US$50 per barrel range.

One very good reason why the Fed want US interest rates higher in 2016 is that if the global economy is hit with another shock, the US will have the ability to cut interest rates to restore market confidence. By not raising rates when the economic rationale demands it, the Fed run the risk of having now ammunition to fire when they might need it at a later date.

The Yellen signal last Friday is a significant event and now it is expected that the mood and sentiment in the global forex markets will turn much more positively for the US dollar. The growing prospect of US interest rates increases over the remainder of the year is not good news for US sharemarkets who have been dining out on zero interest rates for several years now. Typically, the NZ dollar depreciates in times of falling equity markets and “risk-off” global investor market sentiment.

The Kiwi dollar climbed to a high of 0.7370 just ahead of the Yellen speech, however was slammed back immediately to 0.7220 as the markets reacted to the Yellen speech. Prior to succumbing to renewed US dollar strength, the Kiwi dollar was pushed up through the 0.7300 resistance level by yet another RBNZ statement that sent the currency higher (instead of lower as the RBNZ have themselves have wanted to do for more than 12 months now).

Last week a speech on monetary policy by Governor Wheeler failed to express any concern that the NZ dollar had appreciated significantly since the 0.25% interest rate cut by the RBNZ on 11 August. The financial markets were conditioned by the RBNZ in late July to expect a reasonably aggressive monetary policy loosening over the remainder of 2016. Incomprehensibly, the RBNZ have seemingly deliberately under-delivered to that market pricing and the result has been a higher Kiwi dollar, rather than the desired depreciation.

In the 11 August Monetary Policy Statement and last week’s Wheeler speech, the RBNZ have miss-read the financial market sentiment/pricing and their statements have made life a lot tougher for themselves. If you keep on shooting yourself in the foot at some stage you might expect a decision not to pull the trigger of maybe move the foot!

Whilst continuing positive economic growth in New Zealand and the dramatic recovery in dairy prices are very positive factors for the Kiwi dollar, the exchange rate is a relative price to the USD itself.

For the first time in many months the direction of the US dollar looks much clearer cut for significant gains from current levels. The NZD/AUD cross-rate has retreated from highs above 0.9600 to 0.9550 following the Yellen speech.

The Kiwi dollar has outperformed the Aussie dollar over recent months, however the NZD/USD rate appears more over-stretched than the AUD/USD rate which has been stable around the 0.7600 region. Expect to see the trans-Tasman speculators now sell the NZD against the AUD, pushing the cross-rate back to the 0.9000/0.9200 area.

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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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13 Comments

The very clear signal from the Federal Reserve Chair, Janet Yellen at last weekend’s Jackson Hole speech was that US economic conditions have improved to the point that a 0.25% interest rate increase is very much “in play” for the 21 September Fed meeting.

Hmmmm....

Yesterday’s publication of PCE and Personal Income also included the monthly update for the PCE Deflator, the Federal Reserve’s stated preference for measuring inflation in the economy. The June 2016 figures for the deflator were also negative in terms of both short and longer term perspectives. The year-over-year change in the index was just 0.88%, down slightly from 0.94% in May and the second consecutive deceleration. Benchmark revisions altered somewhat the exact numbers for the past few years, but overall measured inflation remains suspiciously subdued.

Going back to December 2014, the new revised data set shows only one month (January 2016, ironically) out of the past nineteen with more than 1% inflation. The record of total futility now stretches an unthinkable 50 months; the last time the PCE Deflator showed price changes equal or “better” than the official monetary policy target of 2% was April 2012. Not only is calculated inflation stretching more than four years of defiance, it is again moving in the opposite direction of official monetary goals. Read more

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There is no money in monetary policy currently practiced by global central banks - their prior actions have made them redundant and it's high time politicians took their authority to create more carnage away.

Even a former member of the Federal Reserve Board is fed up with the displayed incompetence. Read more

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Is it that the Fed and other central banks are being incompetent or is it that a lack of adequate fiscal responses by Governments forces the hand of these banks and means that there is too much emphasis on monetary policy? The IMF and a number of central banks are calling for more action on the fiscal front by governments so that there is balance and consistency between monetary and fiscal policy, but we are not seeing that..

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I doubt the current level of national indebtedness gives the government room to deficit finance public expenditure in the government debt space. Calling upon foreigners to extend their charity is a possibility, but a sovereign debt downgrade would negatively impact the cost of servicing private domestic bank debts, given the rating agencies claim the prospect of the government bailing out banks underpins their current credit ratings.

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So the United States should raise interest rates, which very likely will induce a global recession, including the US , at which point the Fed will lower rates to ensure the markets do not get upset.. Bottom line if the Fed raises , China will devalue, it is no longer 2008 , commodities will fall, 'deflation' will cause the fed to stop raising or indeed cut, and the NZD will

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Why will the US raising interest rates cause a recession....

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Dollar denominated debt, reversal of capital flows in emerging makets from Asia to South America and in particular China, the simple fear of a stronger dollar. . 'If we were to raise interest rates and were to trigger a downturn, we have limited scope for responding and thisi is an important reason for caution'- Janet Yellen Nov 2015. How many years have we listened to central bank (including our own ) crap.

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So Cowpat, US rates (read global rates) pretty much must stay at zero forever ? With the fixation on borrowers, have you given consideration to the impact upon the investments community (e.g. pension funds, insurance companies etc) especially those with defined benefit schemes ? T\Do you think you might be creating an additional impending crisis in the next few years ?

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I see 10 year treasuries going negative first , in part due to a impending shortage( as equities get sold off) and in part a flight to 'quality, as global growth continues to under perform admidst continuing waves of deflation . There will be currency and trade wars, possibly more QE China will be front and centre .. Each way I look there will be a crisis. Raising US rates by a percentage point would see massive losses at the long end of the yield curve. Central banks are trapped,because what they assumed would happen , has not.. At some point there will be inflation. Currently I have open positions for NZD to hit 90 US

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So do you think that there is a right for the investment community to unearned income in perpetuity? Do you think the productive side of the economy is able to take an infinite redistribution of wealth? Do you not think there is any connection between the size (price and quantity) of the investment assets and their yield? ie: you seem to think yield is driving this, have you ever though that it might be asset price inflation creating a surplus of assets, thus driving down yield.?

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So pure speculation then...... with no evidence.

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