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Opinion: Soaring Kiwi dollar not expected to last, but will the RBNZ try jawboning the currency lower?
By Roger J Kerr
The majority of reports on the foreign exchange market cite USD weakness as the sole reason for the NZD/USD gains to above 0.7900. However, the reality is that over the last week the USD has actually stabilised against the Yen ad Euro and thus we have witnessed separate and independent NZD strength.
The US Federal Reserve’s package of quantitative monetary easing has to date not weakened the USD any further than $1.4000 against the Euro and 80 against the Yen.
The Kiwi has continued higher under its own steam on the back of a rampaging Australian dollar which we follow and more positive economic data here in New Zealand. Whether the NZD/USD rate can go above and hold above the 0.8000 level (it was last here in early 2008) is open to debate and will depend on the following key influences:
- The failure of the USD to weaken any further against the Euro after the printing of more USD’s by the Fed Reserve, does suggest that the profit-taking and unwinding of short-sold USD FX market positions will now occur (even if there is no immediate sign of that happening as yet)
- The Australian dollar has had a spectacular run up to parity (currently $1.0160) on the back of higher commodity prices, weaker USD and higher Australian interest rates. Those positive factors need to continue for the AUD to make further gains.
- The timing of interest rate increases in New Zealand.
Latest NZ employment and business confidence data suggests the economy is travelling much better than pessimistic RBNZ forecasts for the domestic economy predicted.
Stronger than forecast GDP growth lifts inflation risks, however on the other side the much higher NZD value reduces prices on imported consumer goods.
Short-term market swap interest rates have increased, aiding the NZD buying decisions.
The NZD buying does not appear to be permanent capital inflows into New Zealand, therefore the speculators and hedge funds now all holding long NZD positions will at some point decide to reverse their trades.
Currency market profit-taking, stimulated by any snippet of less positive economic news, would appear to be the most likely source of NZD depreciation over coming weeks.
The reversal of the Kiwi back to 0.7500 could be as rapid as the jump from 0.7500 to 0.7900 witnessed last week.
The overall value of the NZ dollar, measured by the Trade Weighted Index has increased substantially over the last week, up 5% from 66.00 to 69.50. The TWI is now well above the assumed levels the RBNZ apply in their economic forecasts; the forward inflation risks are therefore reduced.
It would not be surprising to see the RBNZ make a comment about the rapid NZD appreciation in an attempt to jawbone the currency back down, as the exchange rate changes are threatening the export-led economic recovery.
Expect to see howls of protests from farming and export lobby groups that someone should do something about the currency value. The RBNZ will not be inclined to intervene directly in the FX markets (they do have the power to do so) as the forex market is not dysfunctional.
Some will argue that the RBNZ should be considering intervention as the TWI jump is nearing the realms of the “extreme over-valuation” pre-requisite criteria that must be applied by the RBNZ. Governor Bollard will first attempt to use his words to put some fear into the speculators to reverse the Kiwi dollar back down.
This week’s G20 meeting of world leaders should not have too much influence on global FX markets. Both the Chinese and the Americans have been working hard to diffuse any major rifts on the economic/currency policy front.
The Chinese realise that they cannot ignore the West’s concerns about their exchange rate policy as it is very much in their interests that the global economy continues to recover to stronger growth. The Chinese have tightened monetary policy and will tighten again before the end of the year.
The US, Japan and the UK have all loosened monetary policy in recent weeks to help their economies; the Europeans need to do the same. Stronger consumer demand is needed in Europe to counter the austerity fiscal policies of Government spending cuts and tax increases, to lift overall economic performance. Lower interest rates will help consumer spending and eventually the ECB will be pressured to cut Euro interest rates. As a consequence of a surprise cut in Euro interest rates, a reversal in the EUR/USD exchange rate from $1.4000 to $1.3000 over coming weeks stands as the most likely cause of the Kiwi returning to below 0.7500.
* 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