Opinion: Why the Kiwi$ should drop to at least 65 USc in next few months

By Roger J Kerr The Kiwi dollar is down 2½ cents against the USD from a week ago (0.7350 to 0.7100), the NZD selling being related to some very good underlying reasons for a lower currency value. The very same reasons still exist today and there would be no surprise to see the Kiwi down another two cents this week to below 0.7000. The NZD selling does not have much to do with the NZ economy or when low interest rates may be removed by the RBNZ. Although, (as we expected) the low CPI inflation outcome was seen by overseas currency market players as a negative for the Kiwi and initiated the selling.

Weaker global sharemarkets, lower commodity prices, a weaker AUD and a stronger USD last week continued to put downward pressure on the Kiwi dollar. Retaliatory regulation from the US Government on the excesses of the big US banks has certainly dented equity investor confidence. Equity market volatility is up and as a consequence risk aversion from fund managers is up and this always means a lower NZD. I do not see the current uncertainties coming out of Europe and China in respect to what it all means for global GDO growth in 2010 as going away in a hurry. In my view, there is now a clear realisation in investors' minds that the strong gains in shares and commodities in 2009 did indeed price too much expectation of what 2010 would deliver. We are now seeing a major correction to that over-inflated market pricing and we may only be at the start of that corrective phase. Many market commentators were calling the share price gains last year as a "bear-market rally" that was never going to last too long. The evidence is gathering that their prognosis may have been on the money. The very close correlation between the NZD/USD and EUR/USD rate has been re-stated again with the NZD weakness last week catching up to the earlier Euro weakness. Based on the historical linkage the Kiwi has some further catching up to do. If it is good enough for the Chief Investment Officer of China's largest wealth/investment fund to be positive on the USD against major currencies this year, it is good enough for me to follow his view. A stronger USD to $1.3000 against the Euro by some 8% (from current $1.4150) should see the Kiwi at least six cents lower to 0.6500 over the next few months (see chart below). "”"”"”"”"”- * 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