By Roger J Kerr
The Kiwi dollar has consolidated at the lower 0.7000 level over the last week.
A number of attempts to push below 0.6980 have failed, however there appears to be few buyers of the Kiwi around to lever it higher.
The attraction of the Kiwi dollar as a safe-bet “carry trade” currency to buy for US hedge fund investors has waned over recent months as NZ interest rates have been cut,
US interest rates increased and the US dollar itself has rallied. For the short-term it looks like the US dollar has run out of some steam in its gains from $1.1300 to $1.0600 against the Euro.
Therefore, the Kiwi has temporarily stopped at 0.7000.
The week ahead throws up some interesting developments that will determine whether the US dollar continues to strengthen to $1.0000 against the Euro, or whether it has already moved as far as it was going to following the boost it received from the Trump election victory.
Should the OPEC countries reach a production containment deal at their meeting in Vienna the oil price may well rise toward US$60/barrel.
Any hint of a lack of agreement within OPEC and the oil price may well weaken back to US$40/barrel.
A lower oil price would typically produce a stronger US dollar (and vice versa).
Potentially propelling the US dollar stronger (Euro weaker) will be an uncertain outcome in the Italian constitutional referendum later this week.
A blow for the Italian Government may well set the scene for general elections in The Netherlands, France and Germany next year.
If they go to a similar pattern to the recent US result, then it is hard to see global investors piling new money into Europe and the Euro.
The more likely scenario is a continuation of disinvestment from Europe due to the increasing political risks. Further Euro weakness against the USD has to be expected.
Whilst the US interest rate markets have fully priced a Federal Reserve rate hike on 14 December, a strong Non-Farm Payrolls number this Friday for November will lift pricing for two or more US interest rate increases in 2017.
All these forces continue to be positive for the US dollar and this is why the NZD/USD exchange rate still has some downside into 0.6900 and possibly 0.6800.
Lower oil prices from the current US$46/barrel (WTI) level following the OPEC meeting may well point to Wholemilk Powder prices pulling back from recent strong gains.
Lower US cow feed costs mean increase US milk production and point to more US dairy commodity supply being sold into the Chinese export market, thus depressing WMP prices.
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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
2 Comments
Its interesting that things have been adjusting for some weeks now :-
The NZX has adjusted down to more realistic levels ( altho I think its still overpriced)
The Auckland housing market seems to have fallen at the higher price levels and plateaued at the lower levels
The Kiwi $ has fallen to better levels for exporters
Interest rates seem to have "turned"
I noticed over the weekend there are many many press advertisements for new-build homes all over Auckland around the $900,000 and upwards level ............... methinks selling these properties is no longer easy as shooting ducks in a tunnel
Agree. I think we're quite possibly at some kind of high tide mark. If you look closely, then the clusters of signs are there. Personally, I'm glad the NZX50 isn't growing at such a crazy pace anymore, and I agree that it's certainly still overpriced (as are most indices in major world markets). Part of it is that There Is No Alternative for placement of investments outside of property, but once interest rates rise again, cash will become more attractive and the tide may well start to go out slowly on equities.
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