By Roger J Kerr
What a difference a day makes.
That is certainly the case in currency markets as the Kiwi dollar spirals higher to above 0.8000 again on the back of instant euphoria that European leaders can actually agree on something and make decisions.
Just when it felt like the NZ dollar had raced up too quickly to 0.7900 from 0.7500, and was due for a downward correction, the “risk-on” mode has returned to global financial and investment markets with vengeance.
It would be a brave man/woman who would trust this return of investor confidence as permanent.
As has been seen before with European solutions over the last three years, it gets a lot harder when the detail is worked through and they find legal and constitutional reasons for why it is not as simple and straight forward as the political leaders proclaim in their announcements.
My take on Friday’s European developments is that the market euphoria will be short-lived.
Therefore, it is difficult to see the two cent jump up in the EUR/USD rate to $1.2630 being sustained, particularly when the ECB may cut European interest rates on Thursday morning (our time).
One could read such an interest rate change a couple of ways for the NZD/USD exchange rate. If the Euro weakens back to $1.2400 against the USD, we generally follow, thus a weaker NZD. However, global equity investors will react positively to lower European interest rates and the Kiwi dollar could potentially follow the Dow Jones Index higher.
In the same light, it will be interesting to see how the Kiwi reacts to the US employment figures that are due out this Saturday morning. A monthly increase in new jobs below the 75,000 to 90,000 the pundits expect would see increased expectations of QE3 monetary stimulus from the Federal Reserve. Printing more USD’s and pumping them into the US economy is negative for the USD currency value and thus positive for the NZD/USD rate. The US ISM manufacturing data the day before may provide a pointer to the latest state of play with the US labour market.
All in all, the Kiwi dollar is set for a volatile week and could end the week at 0.7800 or 0.8200.
However, the movements in the NZD/USD rate over the last six months confirms the long-term uptrend in the NZD currency value, with the regular pull-backs all very brief affairs and ending at a higher level than the previous downward correction.
The rapid rebound to 0.8000 by the Kiwi dollar certainly confirms the need for USD exporters to have discipline to hedge on the way down, as it is always too hard to pick the bottom and then add to hedging when it is zooming up again.
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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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