By Roger J Kerr
The New Zealand dollar has been putting in the hard yards to stabilise itself in the 0.7700 to 0.8000 region following the rapid depreciation from 0.8600 to 0.7700 in May.
The longer the Kiwi dollar trades in the range the more likelihood there is that the next significant move will be upwards to back above 0.8000.
However, given the general USD strengthening environment now prevalent in global foreign exchange markets, any short-term NZ dollar gains to above 0.8000 are expected to be relatively short-lived.
Once the USD starts to post more serious gains against an always vulnerable Euro, the NZD/USD rate can be expected to follow to some degree and return to the 0.7700/0.7800 area.
The USD itself has been unable to sustain the gains it made against the Euro to $1.2800 two weeks ago. US Federal Reserve Chairman Ben Bernanke did finally last week hose down financial markets expectations about the amount and timing of the “tapering” of their monetary stimulus bond buying.
Bernanke merely reminded the markets that the speed and timing of the unwind would always be dependent on the economic data, particularly the US unemployment rate over coming months.
The EUR/USD rate returned to $1.3100 and this allowed the Kiwi dollar to make gains to 0.7940 as the USD weakened on Bernanke’s comments.
Provided one has confidence about the sustainability of the stronger US economy then further US dollar gains have to be expected on the back of the superior economic performance over Europe.
Local news is positive
Local economic news continues to be very positive with both business and consumer confidence remaining at elevated levels.
Wholemilk powder prices have recorded further strong gains in the regular Fonterra on-line dairy product auctions.
There is no questions that a $7 dairy milksolids payout will be a major boost for the NZ economy and play a central role in keeping the NZD/USD exchange rate in the high 0.7000’s despite a stronger USD against other currencies in global FX markets.
Higher rates of spending and investment by dairy farmers will add to the economic impetus already coming from rising house prices.
The high terms of trade that come from the high dairy prices, coupled with 3% to 4% GDP growth that will lead to interest rate increases in early 2014, provides substance to the view that the Kiwi dollar will outperform all other currencies in the face of a stronger USD over the next 12 months.
If local exporters in Euro and GBP are not lifting hedging percentages against the probability of materially higher cross-rates in the future they will be unnecessarily putting hard-earned company profit margins at risk.
AUD/USD still dominates NZD/USD direction
Day-to-day NZD/USD movements are still dominated by AUD/USD movements in the currency markets.
The Australian dollar has been struggling to hold its ground in the 0.9000 to 0.9200 trading range against weaker mining/metal commodity prices, weak economic data and widespread expectations of further RBA interest rate cuts.
The latest meeting minutes from the RBA however do suggest that the sharply lower AUD value in recent months has convinced the RBA that monetary conditions are now sufficiently loose to not warrant further immediate cuts in their OCR.
The AUD/USD rate has been able to hold above 0.9000 to the USD because the Aussie moneymarkets have started to price-out more interest rate cuts.
Awaiting the AU election
All Australians are sitting on their hands until their general election is out of the way.
Changes to economic policy direction are not expected on a change of Government in Australia.
As always, the short, medium and long term direction and level of the Australian dollar is entirely dependent on Chinese economic performance.
Economic data in China has generally come out weaker than prior market expectations over recent months; however a stabilisation in the trends should allow the AUD to hold above the crucial 0.9000 level to the USD.
The NZD/AUD cross-rate continues its sharp climb to 0.8600 on the back of NZ interest rates moving up and Australia’s interest rates being stable to down, as well as NZ export commodity prices still increasing whereas Australia’s hard commodity prices have been stable to lower.
The debate will now start as to whether the NZD/AUD cross-rate can reach 0.9000 over coming months.
NZ two-year interest rates moving to more than 1% above Australian two year interest rates within the next six months would certainly suggest the cross-rate reaching 0.8800 at the very least. It is difficult to see what could go wrong in the NZ economy vis-à-vis Australia to cause the NZD/AUD cross-rate to reverse back down.
Only unwinding of speculative positions in the FX markets to take profits on long NZD positions against the AUD would cause a temporary reversal downwards.
Potential repatriation of large amounts of superannuation fund proceeds from Australia to New Zealand also stands as a reason why the NZD/AUD cross-rate can move higher from 0.8600.
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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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