By Roger J Kerr
The conditions were not quite right last week to push the Kiwi dollar below the key 0.8000 level; however with Europe and the Euro deteriorating further, Kiwi dollar selling took the rate to lows of 0.8120.
The decision late last week by the various central banks to assist European banks with short-term funding and liquidity problems provided a temporary reprieve for the EUR exchange rate from further selling.
Of course, the emergency USD funding for the banks does not solve any debt problem in Europe, and just delays the inevitable of a Greek default and European banks writing-off the value of the Greek bonds on their balance sheets.
The recovery of the EUR/USD rate from $1.3500 to $1.3800 allowed the NZD/USD rate to bounce off 0.8120 and push above 0.8200 again.
The European problems are far from being resolved with the Social Democrat Party in Germany (Chancellor Angela Merkel’s party) losing considerable ground in regional elections in Berlin over the weekend. The real risk of a Greek default remains and market pressures can be expected to be re-exerted this week in the currency markets, sovereign bond markets and on the share prices of European banks in the equity markets. All this adds to a greater probability of a decreasing EUR/USD rate to below $1.3500 and the Kiwi pressing 0.8100 again.
The focus of currency markets this week will be on the Federal Reserve FOMC two-day meeting in the US to thrash out whether a QE3 printing of more USD’s is necessary and what it will achieve. We will have news through from that meeting on Thursday morning NZT.
The debate is whether Chair Ben Bernanke can get majority support from the voting Fed Governors to provide more stimuli for the US economy to lift economic growth and produce jobs. Printing more USD’s for the banks to hold on their balance sheets will not be effective (many of the lending channels remain clogged-up in the US).
The housing market in the US needs much more than record low mortgage rates to recover. However, that policy initiative has to come from the Obama Government and I expect Ben Bernanke to state this rather explicitly. The markets seem to be anticipating a form of QE3 (maybe delayed in implementation), however the mood does not appear to be to sell the US dollar big-time on such an announcement.
Locally, we have Balance of Payments Current Account and GDP data for the June quarter on Wednesday and Thursday respectively. GDP growth will be down on the strong 0.8% expansion in the March quarter. Weaker than expected wholesale trade and still poor construction industry activity levels will pull down buoyant agriculture production/prices in the overall scheme of things.
The markets are forecasting +0.7% for the quarter, however that feels too high on top of the strong gains in March.
A weaker than expected +0.4% result may well cause NZD selling. Fonterra release their financial results on Thursday, which will include the actual NZD/USD conversion rate achieved over the past 12 months. Fonterra have maintained their $7 milksolids payout forecast despite a rising Kiwi and falling wholemilk powder prices. In addition to currency hedging, it appears that they have astutely sold forward milkpowder at the record high prices available earlier in the year.
All of the above will be influential on the NZD/USD exchange rate movements at the margin; the real game breaker for the Kiwi is what the AUD/USD rate does.
I am picking that the mood and sentiment in global FX markets has turned against the Australian dollar, in much the same way that their rugby team displayed they are just a one-trick pony on Saturday night.
The vulnerability of the Australian economy and dollar to a downturn in metal/mining commodity prices is acute in my view. The CRB Index continues to trend down and indications within China are that the tighter monetary policy has slowed the internal infrastructure spending.
Recued global growth forecasts remain negative for hard commodity prices and the AUD. The AUD/USD rate is now trading below its 200-day moving average and I expect global FX players to be more inclined to sell the Aussie than buy it from here. RBA minutes to be released this week may provide some ammunition to that market sentiment.
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* 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
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