By Roger J Kerr
Has the anticipated NZ dollar pullback to below 0.8000 been stymied by Ben Bernanke’s 'grave' concerns about US unemployment rates?
Unlike most other central banks, the US Federal Reserve has responsibility for jobs and economic growth, as well as inflation control.
There was nothing really new in the Bernanke Jackson Hole speech in respect to his view on the US economy. No recognition of the improvement in US economic data we have witnessed of late through July and August.
The markets have interpreted the speech as increasing the probability of the Fed printing more dollars under a QE3 stimulus.
I am not so sure about that.
There is no question that at the US household level, in terms of jobs, house values and consumer spending things have improved over the last two months after a soft patch in the data from April to June.
If this Friday’s Non-Farm Payroll employment number for August comes out below a 100,000 increase the markets will push even harder for QE3.
However, a monthly jobs increase above 150,000, on top of the stronger July number, will suggest that the US economy is back on track under its own steam and does not require any further Fed monetary stimulus.
Of course, it will still take a while for the unemployment rate to reduce, however Mr Bernanke maybe satisfied that the economy is finally heading in the right direction.
Therefore a weaker USD on global FX markets from further Fed QE3 action is by no means a forgone conclusion.
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Arguably more important than QE3 probabilities for near-term direction of the NZD/USD exchange rate is whether the Reserve Bank of Australia will be forced by the sheer weight of economic evidence to change its tune on monetary policy signals across the ditch.
The official RBA line is that they are in “neutral” mode and on hold with no bias up or down in interest rates, waiting to see the impact of earlier cuts on the Aussie economy.
However, Chinese economic data continues to deteriorate and very soon my feeling is that the RBA will suddenly change their rhetoric to recognise the problems a high AUD and falling metal and mining commodity prices causes their economy.
Retail sales, employment and GDP data out this week in Australia should play a part in determining whether the RBA recognise the latest downturn in their economic conditions.
Weaker than anticipated numbers this week will be immediately reflected in the financial markets via a lower AUD rate against the USD.
As always, the Kiwi will follow the AUD lower.
The expected AUD and NZD movements in the short-term due to China/RBA factors appears to be independent of European and US influences on the USD currency value generally.
Therefore we can expect lower NZD cross-rates in the short-term against the Pound and Euro as those currencies stay relatively stable against the USD.
Local exporters should see any dip lower in these cross-rates as a hedging opportunity, as in the medium to longer term it is very hard to see the NZ dollar underperforming the Euro against the USD.
The high probability is that the Kiwi will out-perform and thus the cross-rates move back 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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1 Comments
Roger,
You may be right in terms of where the market goes in the next 3 months, based on history. On fundamentals, Europe actually is broadly in balance in its current account; while we of course have a 4% growing to 7% deficit assuming RBNZ and government inaction as in the past. So over time the NZD should drop against nearly all currencies, especially if dairy prices follow minerals down. (Our reasonable hope is that they probably won't- protein demand vs supply will likely stay up longer than iron ore demand vs supply).
Who knows whether Europe will in the end print; the Americans, Brits, Japanese and Chinese certainly will.
Two Key questions; if the Aussies actually open the taps with significant easing quickly, as seems likely, will our NZD just follow the AUD down; or will we actually have to do something proactive so not to be uncompetitive with Australia, as well as the rest of the world as we are now? With Bollard on the way out and a new man arriving soon, have we any decision making capability, especially given the Key/English penchant to do nothing and trust the "markets"?
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