By Roger J Kerr
On the premise that the weakening of the USD as a result of QE3 is already fully priced into current currency values (as discussed last week), the NZD/USD direction from here is even more dependent on what the following two central banks do over the next fortnight:
Reserve Bank of Australia
OCR cash target review on Tuesday 3 October with the economic pressures mounting from falling commodity prices and the high AUD/USD likely to cause 0.50% interest rate cut.
The moneymarket pricing is 50/50 on a cut, however the balance of probability is favouring a belated recognition by the RBA to the dramatic slowdown in China and thus monetary conditions in Australia are far too tight for the now negative outlook for the economy.
European Central Bank
The meeting on Friday 5 October will extend “whatever it takes” to include cutting Euro interest rates, which will send the EUR/USD exchange rate from $1.30 back to $1.22.
The divergence of the EUR/USD exchange rate from its interest rate differential of late is telling and just not sustainable (see chart).
As investment market risk sentiment has improved in Europe over recent months we will not see the NZD out-perform the EUR against the USD going forward, as was the case in May/June when safe haven flows flooded into the Kiwi.
Therefore, the NZD/USD rate is now likely to follow the EUR down against the USD.
A 6% fall in the EUR/USD rate to $1.22 will tend to push the NZD/USD rate 6% lower from 0.8250 to 0.7750 over coming weeks.
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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
Here's one for you Roger. The reserve bank implements a reserve bank currency levy and sets a trading range of say 65 - 70c if the dollar trades above or below that range a levy is charged on top of the currency rate say 1percent this levy goes to the govt coffer to pay off debt. What do you think.
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