By Roger J Kerr
The Kiwi dollar exchange rate is showing signs of settling in the mid-0.7000’s, as we expected it would.
Contrary to the opinion of several local financial market commentators, I think forex market and general financial market volatility will reduce over December/January holiday period due to hedge fund speculators downsizing their bets after an exhausting year.
As the year draws to a close with the NZD/USD exchange rate likely to end the year at the same level it started in January (0.7700), it is timely to look forward to the likely 'big themes' that will influence the offshore and local forces on the NZ dollar in 2012.
- New Zealand GDP growth:
When we are tracking at +3.00% annual growth in mid 2012 it is hard to see the RBNZ leaving rates unchanged at current levels. Rural incomes are up, household e-leveraging has run its course and job security has improved to help consumer spending.
- NZ residential property market:
Do not place too much credence on the recent 'Economist' article that sees our market 25% over-valued. It is always over-valued on price to income ratios. An examination of very recent trends of mortgage approvals, number of sales and house prices in the Auckland market suggests that the shortage of supply created by the very low house building rate over recent years is starting to force upward pressure on the market. When the RBNZ see the credit figures moving upwards next year do not be surprised to see Governor Bollard citing their old nemesis of inflation risks coming from the property market. The change in interest rate market direction and sentiment will push the Kiwi dollar back up again.
- European economic recession:
The recession will hurt Euroland Government finances, however further catastrophic financial shocks are unlikely in 2012 in my view. It is a long, hard work-out from too much debt in Europe; however it is not the end of the world. However the Euro currency has to be quids on for further depreciation against the USD to below $1.3000.
- Improved US economic performance:
Whatever numbers you look at there is optimism that the US economy is on the mend and may surprise with its growth rate in 2012. Consumers and corporates are appearing much more positive, it just needs the politicians to sort their stuff out and all the indicators will be pointing north.
- Chinese economy:
No hard landing from the monetary tightening earlier this year. Increased domestic/infrastructure spending replacing weaker manufacture/export activity due to the European recession i.e. annual growth rates stays above +7.50%.
- Commodity prices:
Those savvy Chinese buyers always wait for the price to retreat from over-heated highs and they appear to be re-entering the market now: that means no further material falls in hard or soft commodity prices in 2012. Wholemilk powder prices have found good strong support at USD3,500/MT, which is very positive for the NZ economy in 2012.
- Oil market:
Oil prices have diverged from general commodity price declines of late due to Iran tensions and non-OPEC countries not being able to supply the volumes required. Despite lower global growth forecasts, oil prices have increased.
Net, net result for the NZD/USD exchange rate is generally stable at or just below current levels in the first quarter of 2012, however a greater probability of rising above 0.8000 again after that.
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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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