By Roger J Kerr
Despite generally stronger economic data in New Zealand last week, the Kiwi dollar seriously under-performed the Aussie for the simple reason that our two-year swap interest rates decreased on the LVR announcement, whereas the Australian two-year swap rates increased.
The interest rate gap has reversed from recent divergence, thus sending the NZD/AUD cross-rate crashing back from above 0.8800 to 0.8630.
Predictions from some quarters a few weeks back of a 0.9000 to 0.9500 NZD/AUD cross-rate have been rapidly forgotten as more recent developments have prompted market profit-taking on the run-up from 0.8000 to 0.8800.
However, looking ahead the NZD/AUD cross-rate is expected to trade in a 0.8600 to 0.8900 range as stronger NZ economic data and higher NZ interest rates underpin the rate.
The new 0.7700 to 0.8100 trading range for the NZD/USD exchange rate is also becoming very well established with week to week volatility causing tests of both ends of that range over recent months.
Positive economic data, high milkpowder prices and rising interest rates in 2014 will push the Kiwi to the top end of that range; however a stronger USD/weaker Euro and global disinvestment from emerging markets will pull the Kiwi down to the bottom end.
USD exporters still need to maintain reasonably higher hedging percentages.
The USD would need to really take off globally against all currencies for the NZD/USD to be pulled below 0.7600 and despite tapering of the Fed’s QE programme, the USD has been unable to strengthen against the Euro of late.
I still expect the USD currency to lift its game and the Euro to weaken once the northern hemisphere FX markets return to full volume/liquidity over coming weeks after the end of the summer holiday period.
A EUR/USD exchange rate moving from $1.3400 to below $1.3000 over coming weeks will keep the Kiwi dollar at the bottom end of the range.
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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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