By Roger J Kerr The trend down in the Kiwi dollar was never going to be a smooth and tidy one given the increased daily volatility that is now the norm in the foreign exchange markets. The almost daily switching between "risk-on" and "risk-off" in global investment markets is jagging the Kiwi back up again from regular bouts of selling. Hedge funds, bank proprietary FX trading desks and other currency speculators continue to be attracted to buy and sell the AUD (and thus NZD) on these short-term market mood swings. However, there has been no fresh development to change the medium term view that the NZ dollar is on a major downtrend against the USD that should take it to the mid to low 0.6000's. For the meantime, the NZD/USD rate is flicking up and down between 0.6800 and 0.7000 until there is the inevitable build-up in momentum to take it lower. That downward momentum really has to come from the Australian dollar as all the other drivers of the Kiwi dollar still suggest lower levels (i.e. weaker EUR, the wide interest rate gap to the US and still poor economic performance).

It is short term increases in global commodity prices or stronger Australian economic data that is keeping the AUD near to 0.9000 against the USD, and these surges up in the Aussie dollar is keeping the NZD above 0.6800. Australian news and economic data is therefore dominating the market's short term attention with the Reserve Bank of Australia due to review their OCR interest rate today. The moneymarket's pricing is 50/50 on whether the RBA will increase their current 3.75% OCR to 4.00%. Whether the AUD forex market has fully priced another increase at this time remains to be seen, however overall the stability of the AUD in the face of a stronger USD globally does suggest that interest rate increases to 5.00% in 2010 are already priced into the AUD/USD exchange rate. Having surprised the markets by not increasing their rates in January when the expectation was that they would, the RBA would find it hard to justify a "no increase" again when Australian economic data has been unanimously stronger in recent weeks. The net result is that an increase may not push the AUD higher, however a surprise "no change" would led to AUD selling. The choppy up and down movements in international equity and commodity markets this year, with no clear trend/direction evident does underline just how unsure and uncertain investment markets and economic forecasters are about the global economy in 2010. Stronger than expected global GDP growth would endorse the price increases recorded in commodity markets last year and keep the AUD, and thus NZD up. Weaker than forecast global growth outcomes would pull commodity prices down and the antipodean currencies with them. There remain some serious unanswered questions in the big economic picture in 2010:- - When and how do the Americans and Europeans unwind monetary/fiscal stimulus measures and let the economic patients fear for themselves? - Is the US economy on a recovery path and how far ahead of Europe are they? - The US production/manufacturing economic statistics have recovered strongly, but we are yet to see such consistency in US housing/retail data? - What chance of the debt-fuelled property bubble in China bursting with adverse impacts on the global economy? The Chinese have recognised the risk and are tightening monetary policy through more restrictive bank lending ratios. In reaching a firm view on the NZD direction from these overseas influences, account has to be also taken of the local economic questions:- - How long will the Reserve Bank in New Zealand leave official interest rates at record low 2.50% levels this year? The March 11 Monetary Policy Statement should return to "later" rather than "sooner" tone in this respect. - Will our export commodity prices hold their current high levels? - Are the super high business and consumer confidence indices to be believed and will that positive optimism transfer into stronger economic activity? The NZD/AUD cross-rate is starting to drift lower to below 0.7800 reflecting the Kiwi dollar slightly under-performing the AUD against the USD as well as the widening interest rate gap between Australia and New Zealand. NZD/AUD cross-rates into the 0.7700 and 0.7600 region have to be anticipated in the short-term. Much later in the year when the RBNZ is lifting interest rates and the RBA has long finished their increases; the NZD/AUD cross-rate should be heading back up above 0.8000 again. The NZD/EUR rate has stabilised around 0.5000 and can be expected to stay there as the NZD matches EUR weakness against the USD over coming months. The NZD/GBP cross-rate has increased to above 0.4500 as the Pound weakens on its own reflecting their struggling economy and what will be a close-run UK general election in May this year.

"”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. 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