By Roger J Kerr
The Kiwi dollar appears to be living on borrowed time in terms of holding above 0.8200 against the USD.
A number of the key drivers for the NZ dollar are pointing to a shift down in the currency as the next significant market movement.
However, the fact the Kiwi has diverged from these generally reliable determinants over recent weeks and has not depreciated in line with the respective historical correlations does tell us that perhaps some other counter-veiling forces are at work to hold the Kiwi above 0.8200. I struggle to see what those other positive forces may be at this time.
However, two outweighing factors could be at play for the meantime:
- For global FX speculators who still want to be “long China” and would normally hold “long Aussie dollar” positions in the market as a proxy trade to achieve that, the signal from the RBA last week that they will be cutting their interest rates next month may have persuaded the currency speculators to switch their positions from AUD to NZD. The movement upwards in the NZD/AUD cross-rate to 0.7970 confirms that market change.
- New Zealand’s GDP growth outlook is more positive than Australia’s with business confidence at highs in New Zealand, housing market improvement and manufacturing picking up again. We have new data on all three of these economic indicators being released this week. Be careful not to read too much into the NZIER quarterly survey of business opinion not being as positive as the monthly National Bank NZ series, for some inexplicable reason the NZIER survey excludes the largest industry sector in New Zealand, agriculture.
The above factors are not compelling to hold the Kiwi higher than where it should be. I favour the Kiwi catching up to the recent weakness in two of its major determinants – the AUD and Wholemilk Powder prices:
The other predominant lead-indicator for the Kiwi dollar is the Dow Jones Index (fuelling the “risk-on/risk-off” financial market sentiment) which underperformed the Kiwi in January when the Kiwi dollar shot up on strong Chinese economic data; however the DJI has out-performed the Kiwi through February and March and has only recently come back in line.
Looking ahead, in the short-term how the US sharemarket reacts to the ompany earnings results season startying this week and how the AUD reacts to Australian employment numbers and a swag of Chinese data later this week will dictate the near-term NZ dollar direction. The balance of probability favours more downside than upside from 0.8200.
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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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