By Roger J Kerr
What is holding the NZ dollar up?
All the drivers and lead indicators for the Kiwi dollar point to lower levels, however the sellers have yet to emerge to push the currency value lower.
Over recent weeks we have seen a lower AUD due to impending Aussie interest rate cuts, weaker than expected Chinese economic data and generally lower soft and hard commodity prices in global markets. All these negative factors would normally suggest NZ dollar depreciation.
The fact that the Kiwi has not moved out of its now well-established 0.8050 to 0.8300 trading range indicates that there are other positives in play for the currency that are not so apparent. Currency speculators who would normally enter fresh sold-NZD positions on such developments have been reluctant, for the meantime anyway, to sell the Kiwi dollar.
Likely explanations behind the Kiwi’s current stickiness above 0.8000 are:
- FX markets always price future expected changes into the currency value today. High levels of business confidence in New Zealand today point to GDP growth in excess of +3.00% this year. It appears that overseas currency investors and traders believe that New Zealand’s interest rates will increase sooner than what most local economists expect due to stronger economic growth. They are perhaps not prepared to sell the NZ dollar when they know that later this year New Zealand will be the only country shifting monetary policy from loose to neutral.
- Global FX markets are confused and perplexed over the US Fed’s stance on their monetary policy, with recent speeches by Ben Bernanke and other Fed Governors indicating that further QE3 type monetary stimulus may still be necessary to help the US economy recover. US economic data suggests otherwise, however foreign exchange traders do not want to be over-weight USD’s if the Fed is printing more supply of USD’s. A bounce back in US employment statistics over coming months will be the sort of news needed to quell the Fed doves.
- The NZ dollar continues to benefit from being one of the few currencies in the world that is regarded as a relatively safe place to hold funds. The Euro is prone to weakness, so is the USD itself if the further easing argument gains traction.
The aforementioned factors, however do not appear to be sufficient to propel the NZ dollar any higher from current levels.
The stickiness will remain until there is a clearer direction from the international determinants.
The Euro/USD exchange rate is now looking more likely to push below $1.3000 as Spain heads towards the situation that Greece, Ireland and Portugal have all been bailed out from. European economic data continues to deteriorate on top of the sovereign debt concerns. The correlation between the NZD/USD rate and the EUR/USD rate may have de-linked over recent weeks; however it is hard to see the NZD holding above 0.8200 if the Euro is weakening to below $1.3000 against the USD.
The weaker than expected Chinese GDP growth for the March quarter (+8.1% against forecast +8.4%) should weigh the Australian dollar down over coming weeks as metal and mining commodity prices ease off. Chinese demand levels remains the key driver of global hard commodity prices that the Australian economy is so dependent on. The decision by the Chinese to allow a wider trading band for their Yuan currency of 1% from the previous 0.5% is not seen as positive or negative for the AUD or NZD.
NZ inflation figures for the March quarter due for release on April 19 are not expected to surprise to cause any currency market ructions. An outcome of a +0.60% increase for the quarter will reduce the annual inflation rate to 1.7%.
Reserve Bank of Australia Board minutes being released on April 17th should confirm the change of heart that has occurred at the RBA over recent times as they finally realise the massively negative impact the high AUD exchange rate against the USD has had on the Australian economy, particularly their manufacturing and retail sectors. With the resources-related growth now levelling-off in WA and Queensland, the soft underbelly of the Aussie economy is being exposed.
The global investors’ love affair with the Aussie dollar has come to an end, and for this is reason above all others the next major movement in the AUD and NZD will be lower.
After the anticipated weakness in the Euro and AUD pull the NZD/USD rate into the high 0.7000’s over the short-term, the prospect of rising interest rates in New Zealand in later 2012 and into 2013 still stands as a major reason for a rising Kiwi dollar again in the medium term.
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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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