By Roger J Kerr
The anticipated bounce back up in the Kiwi and Aussie dollars against the USD has occurred.
The NZD/USD rebounding from 0.7800 to almost 0.8100. Where to from here is now the question?
As is always the case with currency markets, it depends on your time horizon and how you define that.
My view is that the NZD/USD exchange rate is more likely to go a little higher to say 0.8250 in the short-term, however the medium to longer term outlook is looking more like a sub-0.80 exchange rate, however nothing dramatic.
The influencing factors over the different time buckets goes something like this:-
· Very positive drivers for the Kiwi dollar this week are a higher than expected GDP increase on Thursday morning and a US Fed Reserve FOMC statement that will disappoint many in the market in that a clear signal on tapering-off the monetary stimulus will not be delivered by Ben Bernanke i.e. USD negative
· Looking further ahead over the next three to 12 months, a stronger USD on global FX markets will keep the NZD/USD in-check, however we will be higher on all the other cross-rates as fundamentally the good-performing NZ economy and ultimately higher NZ interest rates means that the NZD will not fall as far against the USD as other currencies.
· Gains in our commodity prices over the last 12 months may moderate a little, however overall they remain a very good news story for the NZ economy and thus the currency value. The forward milk powder prices are still elevated to historical norms and this underpins the currency to some extent.
· The recent strengthening of the Yen, UK Pound and Euro against the USD just does not look sustainable and seems to have been caused by global investment flows reversing out of emerging markets like Chile, South Africa and Mexico and choosing to go to a mix of currencies than just into the USD.
· Despite global interest rates being at distorted low levels over recent years, interest rate differentials still drive medium term currency values and the USD therefore has major ground to make up against the Euro as the chart below depicts. The NZD/USD rate will eventually go back to below 0.8000 as the Euro weakens to $1.2500 against a stronger USD.
The net/net conclusion of all the forces that will determine the NZD/USD exchange rate is that the more likely trading range over the next 12 months is 0.7500 to 0.8300, which is lower than the 0.8000 to 0.8700 rage of the last months.
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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
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