Roger J Kerr says currency markets are recognising that it is not going to be plain sailing for the NZ economy this year. Your view?

 By Roger J Kerr

The NZ dollar exchange rate against the USD has yet again retreated very sharply from the top of its long established trading range of 0.8500 to trade at 0.8250.

The Kiwi has broken below key support lines and seems destined to fall further in the short term.

While domestic economic data has been something of a mixed bag of results of late, it has again been offshore factors that have driven the Kiwi dollar lower:

• The Australian dollar has depreciated from above $1.0500 against the USD to $1.0200 as global investors and currency traders downsize their AUD positions. In addition to capital flows’ reversing out of Australia, the AUD is also under downward pressure from expectations of further RBA cuts to their interest rates, falling hard commodity prices and latest Chinese manufacturing economic data not as strong as the markets expected.

The Australian currency has certainly lost its gloss and status as the safe-haven place to have your money parked away from the financial/economic turmoil in Europe and the US post the GFC. Global funds that came into Australia are now going home as the Australian economic outlook does not look that promising anymore. The direction of the AUD/USD exchange rate movement remains the dominant force over daily NZD/USD direction, although this paradigm was seemingly lost on most local bank economists who were confidently forecasting the NZD to appreciate to 0.8600 and 0.8700 not so long ago.

• The Euro has also reversed engines against the USD, falling from $1.3600 a few weeks ago to $1.3000 as the FX markets realise that a strengthening Euro was not warranted in the face of deep economic recession and a European Central Bank (ECB) more likely to cut interest rates and print money to get them out of the mess they created for themselves. The Euro only strengthened to $1.3600 because the ECB pronounced they had been successful in reducing financial/investment market risk levels in Europe.

The USD itself has also been strengthening against all currencies as US economic data continues to improve, particularly at the household level of jobs, consumer demand and residential real estate values and activity levels.

• Commodity prices have also reduced since early January with the CRB Commodity price index decreasing from above 300 to 290. The Chinese commodity procurement driven demand has eased off in recent weeks as the Chinese importers have completed their stock re-building phase.

What has also been very instructive for the future direction of the NZD/USD exchange rate is its recent de-linkage from the Dow Jones Index. The US sharemarket has continued to make gains above 14,000 which normally would have signaled a “risk on” buying of NZ dollar by hedge funds and currency traders.

The fact that the Kiwi dollar has moved the other way tells us that other factors are overpowering the normal correlation of the “Wall Street up, Kiwi dollar up” syndrome.

Global investment banks, such as Barclays and Deutsche, are reporting that underlying economic fundamentals are reemerging as a stronger determining factor as to whether the hedge funds and macro flow funds buy or sell a particular currency.

While New Zealand’s GDP growth outlook is a positive, the Balance of Payments deficit is forecast to deteriorate again as the Overseas Trade Account is $1.3 billion in deficit. A turn down in our terms of trade index (import and export prices) last week added to the Kiwi dollar selling.

Also influencing the Kiwi to lower levels was a report form credit rating agency Standard & Poor’s about the exposure of our banks to another property market cycle driven by low mortgage interest rates and rising debt.

It certainly appears that the New Zealand economy is becoming lop-sided again with domestic activity and consumer spending on the increase, fueled by rising house values via the wealth affect.

Whereas the export/productive sector, which provides the real income to the economy, turning down under the weight of the drought reducing agricultural production and the high dollar is driving the farm-gate prices lower.

The currency markets may be already recognising that it is not going to be all plain sailing for the NZ economy this year.

The upcoming partial float of Mighty River Power shares will provide some demand for Kiwi dollars as foreign investors place their funds here.

However, the failure of all the recent monetary stimulus in Australia (RBA cutting official interest rates last year) to lift their economic figures will be seen as negative for the AUD by global currency markets.


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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

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Roger's narritive about the future of the NZ dollar is convincing and well reasoned. However it is still just a narritive.
The Kiwi went through the floor in 2008 but has steadily climbed since. New Zealand is regarded as a "safe haven" from the world's woes and people are willing to buy the Kiwi as a "side bet". Until that rose coloured view of our country changes the currency will continue to appreciate.
I'm not saying that view is logical or correct, just that it exists and plays a major role in our currency's apprpeciation.