By Roger J Kerr
Trading across the NZ dollar foreign exchange market over the next few days will determine whether the race up to a high of 0.8430 last week will prove to be a temporary spike or something more permanent.
I favour the former, as the underlying economic fundamentals for both the NZ and US economies on either side of the currency pair have not suddenly changed because the US Federal Reserve have delayed tapering.
I see the Fed’s surprise decision as a postponement in timing of the inevitable, rather than a cancellation of tapering (unwind of monetary stimulus).
A bit similar to the Race Committee boat on San Francisco bay, they can find ways of delaying the inevitable, but it is going to happen!
The massive reaction (or over-reaction) by the FX markets to the tapering non-decision was understandable on the day, because the result was not expected by anyone. However, once the speculators who bought Kiwi dollar at 0.8200 immediately on the Fed announcements last Thursday morning see that there is no sustainable follow-through buying above 0.8400 they will be quick to take profits.
The sharp downward movement on Wall Street on Friday caused by rumours of US Government spending shutdown is very instructive to near-term NZD/USD currency movements.
The Kiwi has de-linked from the Dow Jones Index over recent months after the Aussie dollar tumbled for its own reasons in May/June.
The spectre of US debt ceiling problems and fiscal brinkmanship appears to be spooking the markets again. Thus a lower DJI over coming weeks would suggest “risk-off” sentiment or mode for investors/hedge funds over coming weeks i.e. a lower Kiwi dollar.
There is very little on the horizon this week in terms of economic data that could cause currency shifts. Chinese PMI numbers are always influential on the Aussie dollar and US GDP growth figures on Friday may prove a few sceptics wrong on the strength of the US economic recovery.
Annualised US growth is forecast to be 2.7% in the second quarter.
Our own GDP numbers for the June quarter proved not to be the big negative some flighty economic forecasters were predicting. Basically, retail, construction and manufacturing sector growth offset the sizeable percentage contraction in agricultural production due to the summer drought.
Reports are that milk spring weather is great for grass growth around the provinces and daily milk flows into the dairy factories is huge.
Expect a large GDP bounce back of over +1.0% in the September quarter.
Once the Bernanke curve-ball of last week that caused the Kiwi spike form 0.8200 to 0.8400 is unwound, the Kiwi dollar will be back into positive US economic data matching positive NZ economic data and the NZD/USD rate returning to its established range of 0.7700 to 0.8200.
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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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