By Roger J Kerr
The pressure is coming on the Reserve Bank of Australia from various sources “to do something about” the high value of the Australian dollar.
The Kiwi dollar tracks the Aussie tick for tick; therefore what develops in Australia over coming weeks and months is absolutely key for the NZ dollar’s direction.
There are calls for the RBA to intervene directly in the foreign exchange markets to push down the value of the Aussie as the recent appreciation to $1.0550 has come about when the usual lock-step driver of the AUD/USD rate, metal and mining commodity prices, have gone the other way and decreased (refer chart below).
The divergence does not appear sustainable in the medium term however what has occurred over recent weeks is that the AUD has been pushed up and held up by two related factors:
- The RBA have deliberately moved their monetary policy settings from a previous “easing” bias (i.e. future cuts to interest rates likely) to a “neutral-hold”, thus removing a negative for the AUD exchange rate.
- Asian central banks and sovereign wealth funds continue to increase their allocation of investments into AUD’s (reducing EUR weightings) as they like the higher Government bond yields available.
The RBA monetary policy statement last Friday did not provide any fresh insights into how they are thinking about these issues.
As stated previously, the RBA have been very flip-floppy of late on their outlook for the Australian growth, largely based on how they interpret what is happening in China.
Most commentators see the Chinese economy slowing at faster rate than generally expected, however the RBA still see demand from China as robust. Trade and lending data out last Friday in China was weaker and we continue to hear of anecdotal evidence that steel prices are falling as China has over-produced and thus demand going forward for coal and iron ore will be lower.
Hard commodity prices are stable to lower therefore is it really hard to see the AUD being able to maintain its recent gains.
On top of that, the RBA should be forced to change their positive rhetoric about the Aussie economy as their dominating resources/mining sector is now hammered by the high AUD and lower commodity prices.
The big resources/mining exporters do not hedge forward their AUD/USD currency exposures as there is normally a natural hedge, offset between currency and commodity prices.
Therefore, one has to expect weaker economic data out of Australia over coming months; however the RBA is clearly waiting to observe the impact of past interest rate cuts on the economy before cutting again.
The smart money has to be on the RBA toning their rhetoric back to more of a pessimistic outlook on their economy and thus a flip-flop back the other way on the monetary setting bias, causing the AUD to pull back toward $1.0000.
A five cent decrease in the A$ should pull the Kiwi back three or four cents to the 0.7800 area.
Unsurprisingly, recent jawboning down of the NZ dollar by PM John Key and RBNZ Governor Alan Bollard has little impact in the NZD forex market.
We need a stronger USD globally and a pullback in the AUD before the Kiwi can retreat from recent gains.
The probability of this occurring has increased with the weaker Chinese economic data of late.
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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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