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Roger J Kerr analyses the events likely to have an impact on the Kiwi currency

Currencies
Roger J Kerr analyses the events likely to have an impact on the Kiwi currency

By Roger J Kerr

The Kiwi dollar has (for the meantime) bounced off rates just below 0.7000 to trade back up to 0.7150.

The post Trump election victory rally in the US dollar has run out of steam at the $1.0500/$1.0600 point against the Euro as the markets take profits on the move from $1.1300 and ponder what is next in the US economic/interest rate/exchange equation.

The rhetoric from the Federal Reserve FOMC Meeting next week on 14 December may well determine whether the US dollar gains have some more legs on higher US interest rates, or whether a cautious Fed cause more profit-taking i.e. USD selling.

A 0.25% increase in the Fed Funds interest rates is fully priced-in to the markets and a failure to deliver that increase would be a major and unexpected surprise for the markets.

What will be more important for the currency markets looking forward is the guidance the Fed provide on the likelihood of the quantum and timing of interest rates increases in 2017.

Currently the financial markets are pricing one and a half 0.25% increases next year and two 0.25% hikes in 2018.

Stronger US economic data (GDP, housing, jobs and retail) support inflation tracking higher, however the Fed will not be factoring in any Trumponomics impacts on inflation/growth until the new President is inaugurated in the New Year.

It seems unlikely that the US dollar will reverse engines at this point against the Euro and Japanese Yen as the year winds to an early close in terms of large open market positions.

Given the US data, the Fed meeting and potential political negatives in Europe, it appears more likely that the USD/EUR exchange rate will remain in the $1.0400 to $1.0650 range, than reverse back to $1.1000.

The net result for the NZD/USD rate from USD forces is staying in the 0.6950 to 0.7150 range over coming weeks.

The results of the Italian political referendum on constitutional reform (reducing the size of the Senate upper house from 300 to 100 members) is not known at the time of writing this commentary. However, a “No” vote would see further political uncertainty in Italy and thus Euro weakness as the markets worry about further anti-establishment/anti- EU voting momentum in elections for The Netherlands, France and Germany next year.

The NZD/USD exchange rate started 2016 at 0.6800, depreciated to 0.6400 early on when plummeting oil prices and Chinese economic risks caused sharemarkets to sell off. Through the mid part of the year the Kiwi climbed steadily to 0.7400 (contrary to all bank forecasts, but in line with this column’s view at the time!) as the offshore hedge funds saw the NZ dollar as a “sure-bet” on the RBNZ being slow and reluctant to cut the OCR.

The appreciation to above 0.7000 from June until today stayed for longer than expected as it was thought the RBNZ would have been more aggressive with OCR cuts from May to August. The RBNZ have cut interest rates twice since August and that has helped to bring the Kiwi back from 0.7400 to 0.7100.

However, it has been the stronger US dollar and higher US interest rates that have killed off the carry-trade related buying Kiwi dollar as the interest differential no longer provides enough return buffer for these Kiwi dollar speculators.

The NZD/USD has moved 10 cents from its lows to its highs in 2016. The average high to low range over the last 10 years is 14 cents. The forecast trading range for the NZD/USD rate in 2017 therefore cannot be too narrow.

Given that the RBNZ is most likely done with further OCR cuts and the US dollar itself will not appreciate another 7% to below $1.0000 against the Euro, it is difficult to see the Kiwi dollar going below 0.6800. New Zealand’s very strong relative economic fundamentals do not allow depreciation to the mid-0.6000’s and appreciation back to above 0.7400 seems very plausible at some point next year.

Two potential developments could cause the Kiwi dollar to drop below 0.7000 over coming weeks:-

  • Whilst the dairy futures markets are not indicating any pullback to the spectacular increases in Wholemilk Powder (WMP) prices over coming months, the recent plunge in the share price of the listed Australian infant formula company, Bellamy’s over concerns on tighter Chinese import regulations may cause fresh concerns in the dairy commodity market. The level of Chinese import buying demand for dairy commodities in the crucial January/February months may well determine whether WMP can hold on to its current US$3,500/MT prices or not. A downward correction in WMP prices on weaker Chinese demand would pull the Kiwi dollar down.
  • The NZD/AUD cross-rate has spiked back up to its highs of 0.9600. Profit-taking by long NZD/short AUD position takers may well see the Kiwi sold against the Aussie dollar over coming weeks as the traders and speculators close down their books before year-end. Both the interest rate differential and commodity price differential between Australia and New Zealand point to a much lower NZD/AUD cross-rate to below 0.9200. Unwinding of market positions in this cross-rate may well drove the NZD/USD rate below 0.7000 before Christmas.

Both importers and exporters have had favourable opportunities to hedge forward their NZD/USD exchange rate risk over the last 12 months, those that choose not to hedge can expect a similar roller-coaster ride in 2017 to what we have witnessed in 2016.

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Source: CoinDesk

 

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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