By Roger J Kerr
It was a telling outcome last week when the Kiwi dollar fell away from above 0.8200 to the low 0.8100’s despite local business confidence being at 15 year highs.
The AUD/USD daily movements continue to be the dominant influence over Kiwi dollar direction.
FX market attitudes and sentiment towards the Aussie dollar has turned very negative over recent weeks.
The AUD is down six cents against the USD and the Kiwi is down four cents.
Our superior economic performance is aiding the Kiwi to some degree, resulting in the NZD/AUD cross-rate rising from 0.8700 to well above 0.8900.
Basically, offshore currency players are not selling the Kiwi as aggressively as they are selling the AUD.
They are reducing their AUD exposures and investments for some very good reasons:-
- RBA Governor Stevens jawboning the AUD lower as he needs to help non-mining export industries replace the growth that is reducing from the resources sector.
- The Australian Government pumping AUD8.8 billion of new capital into the RBA to be held as reserves. More than half those reserves will be held in foreign currencies, thus the RBA shifting AUD5 billion out of Australia and not worrying about the negative impact on the AUD currency value i.e. they want it lower.
- The currency markets are already pricing the AUD lower as they anticipate much lower foreign capital/investment inflows into the resources sector over coming years. The big investment inflow positive for the AUD over the 2009 to 2012 period is now much reduced.
- Many economists in Australia are picking further OCR cuts by the RBA as economic data remains generally poor. The RBA would prefer a lower AUD to help the economy, however if the AUD is not trading below 0.9000 soon they may well slash interest rates again to get the currency lower in the markets.
The RBA OCR review and GDP data will be the focus for the AUD/USD FX market this week.
A quarterly GDP increase less than the 0.70% consensus forecast may spark renewed AUD selling.
Over coming months the downward direction of the AUD should push the Kiwi dollar to below 0.8000.
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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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