By Roger J Kerr
Rallies upwards in global sharemarkets since 1 January when the US fiscal deficit cliff was "resolved" has been the main reason behind the NZ dollar appreciation to above 0.8400.
The fiscal position in the US is far from resolved; however the markets for the meantime have taken the postponement of spending cuts as a positive.
The Kiwi dollar however has run into something of a brick-wall around the 0.8450 area and has retreated back from this level on several occasions over recent weeks.
The resistance from moving higher has more to the do with currency traders and speculators not wanting to aggressively buy the AUD above $1.0600 against the USD.
It seems the previous 0.8100 to 0.8300 NZD/USD trading range has been replaced by a new 0.8160 to 0.8450 trading range.
The Kiwi was sold down to a low of 0.8160 just prior to Christmas when the September quarter’s GDP growth come out less than expected at a +0.20% increase.
Unwinding of long Kiwi positions ahead of the holiday period contributed to the selling. In thin, less liquid markets the Kiwi dollar was quick to rebound upwards again from 0.8160.
The strength of the NZD against the USD above 0.8000 through the second half of 2012 has played a large part in driving imported goods prices and thus inflation lower.
The 0.2% decrease in the CPI for the December quarter released last week immediately sent the NZ dollar 50 points lower to 0.8350. With annual inflation now below the 1.0% lower limit of the RBNZ target band, some pundits are calling for interest cuts.
It is unlikely the RBNZ will act to loosen monetary policy further given the strong consumer/business confidence surveys and rising house prices.
Likewise they are also unlikely to increase interest rates until either credit growth starts to increase sharply or the currency falls substantially.
Neither is looking likely in the short to medium term, therefore expectations surrounding RBNZ monetary policy decisions are not going to be a factor influencing NZ dollar direction.
Despite the low GDP and CPI results that both forced the Kiwi lower, the overall outlook for the NZ economy is positive.
Asian investors into NZ Government Bonds are buying into that story.
The strong offshore investor demand for the Fonterra listed units late last year was also evidence of that investment asset allocation into New Zealand. Milk powder prices continue to recover higher after the lows of mid 2012.
It does appear that local manufacturing exporters are learning to live with a 0.8000 NZD/USD exchange rate and the negative impact on the economy from the high currency value has not been as pronounced as many earlier thought.
The direction of the Australian dollar is still the key determinant of the NZ dollar’s fortunes over coming weeks and months. Last week’s Australian employment decrease for the month of December may the first in a series of weaker economic data announcements that should limit AUD gains and weaken the currency back.
The USD itself has been strong against a dramatic weakening in the Japanese Yen, however weaker against a resurging Euro following signals from ECB head Mario Draghi that interest rate cuts in Europe are less likely.
It seems that the market have interpreted Draghi’s comments on financial market stability as applying to the European economy as well. They require a weaker Euro, not a stronger one, to assist their exporters to help the economic recovery.
The recent strength in the Euro to above $1.3300 against the USD does not look sustainable on any measure.
Stronger US economic data and poor economic numbers out of Europe should send the EUR/USD rate back to $1.2500. However it will require global FX markets to start pricing in US interest rate increases before overall USD strength will be sufficient to drive the Kiwi dollar below 0.8000.
Even though the US Federal Reserve has tagged changes to monetary policy with the condition of US unemployment falling to below 6.50%, the forex markets will start to price-in interest rate increase well in advance of the likely 2015 timeframe. It is instructive that the AUD/USD rate has been unable to trade above $1.0600 despite more positive Chinese economic data and rising iron ore prices over recent months.
Global investors are displaying reluctance about backing the Aussie economy at such exchange rate levels as weaker domestic economic data and lower commodity prices will send the AUD lower.
The US sharemarket and the local NZ sharemarket may now be getting close to being fully priced. A correction back in the Dow Jones Index through February may well prove to be the factor that pulls the NZD/USD exchange rate back to 0.8150.
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Roger J Kerr is a partner at PwC. 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
1 Comments
The US sharemarket and the local NZ sharemarket may now be getting close to being fully priced. A correction back in the Dow Jones Index through February may well prove to be the factor that pulls the NZD/USD exchange rate back to 0.8150.
Glad to see you have upwardly adjusted the lower bounds of your forecast NZD/USD pair corrections - nonetheless, I would not underestimate the US Federal Reserve's conviction to act to rescue the US stock market from the woes of any downward correction, thus reinforcing upward pressure on the NZD/USD pair.
This graph confirms as much.
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