By Roger J Kerr
The US dollar is on the comeback trail in global currency markets following the monetary and fiscal interludes in the US during the months of September and October that weighed the US unit down.
As anticipated, the forex markets have returned to focus on the underlying strength of the US economy and are marking the US dollar value higher as they now look ahead and not back at the temporary blips of the Bernanke non-tapering decision in September and the US political/fiscal shenanigans through October.
The USD currency index has reversed strongly from lows of 79.20 to trade up to 81.2.
Three pieces of economic news over this past week have been behind the abrupt change in sentiment and direction in the foreign exchange markets:
· US jobs data for October defied the pundits who were expecting a weaker number due to the partial US Government shutdown in early October.
The increase of 204,000 was much stronger than prior forecast and underscores the fundamental strength and now competitiveness of the US economy. Earlier months’ job numbers were revised upwards as well.
The stronger numbers in September and October follow the weaker than expected increases through the mid part of the year, which has been the pattern over recent years in the US as GFC related changes to the employment statistics four years ago distort the ongoing seasonal adjustments.
· US GDP growth for the September quarter was also stronger than expected, coming in at 2.8% on an annualised basis.
Growth in services industries is now following the lift in manufacturing and industrial output which has been provided a real lift from substantially lower energy cost in the US due to the shale gas revolution.
· The European Central Bank finally saw the light and made a decision to cut their official interest rates from 0.50% to 0.25% last week.
Only four out of 104 respondents to a survey of European bank economists had picked an ECB rate cut at this time.
Inflation trending down again was the trigger the ECB needed to surprise the markets with the rate cut.
The Euro weakened from its unsustainable highs of $1.3800 against the USD to trade lower to $1.3350.
The US dollar can be expected to make further against the Euro to below $1.3000 over coming weeks as the reality of the two contrasting economic performances in the US and Euroland sink home to the financial markets.
There is strong jobs growth in the US which means that the Fed’s QE stimulus will be withdrawn from March (if not sooner), whereas the ECB in Europe are still adding monetary stimulus as European-wide unemployment rates increase to above 12%.
The implications for the NZD/USD exchange rate from a stronger USD on the global stage are clear.
Already the Kiwi has recoiled from above 0.8500 to 0.8250 on the back of the appreciating USD against all currencies.
Tempering the reduction in the NZD/USD rate from international USD movements will be continuing strong domestic economic data.
Impressive NZ employment increases last week point to a very strong rebound in economic activity in the September quarter after the summer drought lowered agricultural production in the March and June quarters.
The RBNZ are very conscious of the high exchange rate headwind for the economy when the TWI Index rises well above 77.00, however they cannot really expect the overall value of the NZ dollar to decline when our economy is expanding at above 3.00% and thus outperforming most others. Retail sales, manufacturing and consumer confidence data due for release this week will again confirm the very positive upward momentum of the NZ economy.
The net result of a strong US economy, a strengthening USD currency and a strong NZ economy is a marginally lower NZD/USD rate to in and around 0.8000, however higher cross-rates against the Euro and Pound as those currencies continue to weaken against the USD.
The NZD/AUD cross-rate is forecast to remain in its now well-established 0.8650 to 0.8850 trading range.
The Reserve Bank of Australia is not expected to cut their OCR interest rate any further; however recent poor employment numbers reconfirm that it will be some time before they contemplate increasing interest rates in Australia. Metal and mining commodity prices have trended lower in international markets over recent months, the AUD is expected to lose further ground from 0.9375 against the USD over coming weeks.
Yet again, a Kiwi dollar upwards foray to 0.8500 has failed to hold, thus the currency market speculators will now want to test the downside of the NZD/USD rate.
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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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