Roger J Kerr points out the relatively strong correlation between the TWI and house prices

 By Roger J Kerr

The NZD/USD rate starts the week at 0.7800, slap bang in the middle of its recent trading range of 0.7700 to 0.7900.

However the seemingly stable market conditions are not a good description of the reality of wild two-cent daily swings in the rate on several occasions last week.

Both importers and exporters who use orders in the market to pick up hedging have been rewarded at the extreme ends of 0.7950 and 0.7700 over the last week.

The elevated FX market volatility is expected to continue this week with important Chinese economic data released Monday (GDP, industrial production and retail sales) and our CPI figures on Tuesday.

The Australian dollar remains under downward pressure on lower commodity prices and comments from the Chinese Finance Minister that they could undershoot their 2013 GDP growth target of 7.5% (his comments subsequently “clarified”).

Adding to the recent Kiwi volatility has been less liquid forex markets as northern hemisphere financial centres are less active due to summer holidays.

Unless the US Dollar itself really takes off over the next 12 months, it is hard to see the NZD/USD depreciating to and holding in the low 0.7000’s due to the high NZ commodity prices and rising house prices over the next period.

The long term correlation between NZ currency movements and house price cycles remains reasonably strong. 

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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