By Roger J Kerr
The unpredictable day-to-day volatility in the NZD/USD exchange rate continues unabated with the forex market reacting positively or negatively to the ever changing tide of econo-politico developments in Europe.
Standing back from the daily market noise is always difficult in these situations; however it is hard to put up a strong and convincing argument that the NZ dollar should be roaring skywards at this time.
As has been argued in this column all year, the medium to longer term outlook for the NZ dollar value has to be positive as the NZ economy is an efficient supplier of protein to growing Asian cities.
Foreign exchange rates are relative prices, and relative to the rest of the world on economic fundamentals there are certainly more positives than negatives for the Kiwi dollar.
However, in the short-term (next few months) there are more risks to the downside for the Kiwi due to the following:
- Changes in Prime Ministers in Greece and Italy do not solve the economic and financial market problems in Europe. As the end-of-year approaches, investment market participants will be reducing their appetite for “risk” assets, including the risk currencies of the NZD and AUD.
- The NZD/USD rate follows the EUR/USD and AUD/USD exchange rates and both the RBA and ECB are expected to cut interest rates again, thus weakening those currencies against the USD.
- Lower global growth forecasts = lower commodity prices = lower commodity currencies.
- While the National Party look like governing alone (from the political opinion polls) at the upcoming general election, stranger things have happened in Dallas. Should the Epsom electorate voters not understand the subliminal messages from the PM and vote the National candidate in instead of Banksie, we could end up with the “rainbow” coalition of Labour/Greens/NZ First/Mana and Maori parties. The financial markets would not be expecting such an outcome and would vote with their feet on the prospect of more Government debt and higher taxes i.e. sell the Kiwi dollar down. The probability of this scenario eventuating are probably very slim, however it cannot be totally discounted.
- RBNZ Governor, Alan Bollard takes my advice and hints at interest rate cuts (without actually doing it) in the early December Monetary Policy Statement so that the NZD depreciates. Such a cunning plan to lower the Kiwi’s value would lift our GDP growth prospects in 2012, thus providing Alan with the justification to return the OCR to more normal levels of 4.00%. He has wanted to remove the emergency monetary stimulus for some time; however earthquakes in Christchurch and financial quakes in Euroland have stymied his best intentions in this regard.
- A continuation of the more positive US economic data will differentiate the outlook for the respective US and European economies, thus the USD preferred over the Euro.
As has already been witnessed, the path lower for the NZD/USD rate is not a smooth one, however the overall trend and sentiment still favours the downside over coming months.
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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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