By Roger J Kerr
Two questions to ponder as we rapidly approach the end of the year:-
1. Is all the positive news on NZ's booming terms of trade and economy already fully priced into the current NZD/USD exchange rate of 0.8260?
2. How many of the offshore investors/currency traders who have dumped their AUD positions over recent weeks have switched only temporarily into the Kiwi dollar?
My view is that the money markets have fully priced-in OCR increases over the next two years, therefore the FX markets have also fully priced NZ interest rate hikes in 2014 and therefore we will not see further NZD buying from here on the interest rate expectation.
One could also take the view that sky high milk powder prices and business confidence levels can only really go down from here.
The spectacular Kiwi dollar gains against the AUD to above 0.9220 appear way over-stretched to me.
It is easy to see market position takers unwinding long Kiwi/short Aussie trades that have just returned a five cent gain, before Friday.
Even Thursday's GDP numbers may be swamped by the priority of getting to the beach.
The case for a stronger USD in global FX markets grows by the day with the positive US economic data supporting the currency outlook with US fiscal and monetary uncertainties now well behind the markets.
Traditionally the Kiwi dollar makes gains over the Xmas holiday period; however this year given the over-extended gains against the AUD over recent weeks, we may well see the opposite occur.
The RBNZ need to be more forthright, like the RBA, when it comes to describing the currency headwind the economy still has.
Perhaps an opportunity was missed by Governor Wheeler last week.
Another nine cent trading range for the Kiwi dollar in 2013, which is the long-running average range.
Next year will be no less volatile I suspect.
Have a great Christmas!
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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
4 Comments
A bit of irrational exuberance in the Kiwi$ trade maybe ?
We dont want and cannot afford to have a stronger Kiwi$ and one can only hope the good news is priced into the currency and there is no more upside for now .
Wheeler has the benefit of information asymmetry , I suspect he knows a lot we dont from the models the RBNZ use.
If we were to reach parity with the Aus$ our exporters are in big trouble, and if the effects are severe we could be in for a hard landing later .
Our economy is not out of the woods yet, things are not as good on the ground as they appear to the economists, some sectors are still lagging and I suspect the so called boom in retail sales is really in the sales of construction materials .
There is some of what I see as structural unemployment , with the casualisation of labour , and a lot of under-employment in part-time work and contract work.
The carry trade chasing high Kiwi interest rates may be a factor, but like the tidal effect on a harbour , the inflow can become an equally strong outflow
Must be almost time to sell up in auckland and move to double bay or toorak for that cheap aussie lifestyle!
Nah , the strong currency would not encourage me to go to Oz , but a Greenlabour- Geriatric -Tax and Spend - Coalition might .
Besides , the Aussie lifestyle is not cheap, and there are still plenty of good opportunities here for now
Wrong again. Maybe stick to your day job.
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