By Roger J Kerr
There was a surprisingly tight trading range for the NZD/USD exchange rate over the Xmas/New Year period this year.
The Kiwi dollar oscillated between a low of 0.8145 and a high of 0.8310, returning to 0.8300 late last week on the much weaker than expected US jobs number for December which weakened the US dollar on global currency markets.
The normal pattern if the for the Kiwi to swing wildly in exaggerated movements due to the thin/less liquid FX markets over the holiday period.
However, the more sedate exchange rate behaviour over the Christmas break is not necessarily an accurate indicator of what we might be in store for us in 2014.
The majority of local economic commentators still see the exchange rate as a major headwind for the NZ economy; however they all seem to be forgetting that the very positive economic fundamentals we are enjoying really do support a strong and appreciating currency value.
The exchange rate above 0.8000 for most of 2013 did not prove to be a negative for the export sector or a headwind for the economy as many thought would be the case, as high commodity prices and judicious currency hedging by many companies off-set the exchange rate impact.
So what is my crystal ball revealing for the fortunes and direction of the NZ dollar in 2014 ?
As is always the case with exchange rate opinions, there are no definitive or clear-cut answers.
It is a matter of assessing the probability weightings of the variables that are behind movements in the NZD/USD rate.
While some variables are seen to have a higher weighting in forcing a particular currency direction, over time the probability weightings change as new events and information change the behaviour of currency traders, speculators, investors and hedgers.
My listing of the positive and negative forces on the NZ dollar this year is as follows:
| POSITIVES FOR NZD | NEGATIVES FOR NZD |
| • General US dollar strength against all currencies as US monetary stimulus is gradually removed. | |
| • Record high wholemilk powder prices. | • Low and stable hard commodity prices reducing interest in the AUD and CAD commodity currencies that the Kiwi dollar follows. |
|
• High NZ business and consumer confidence. |
• All the favourable NZ economic performance and rising interest rates is already priced-in to the NZ dollar at 0.8300. |
| • Rising NZ short-term interest rates. | · Currency speculators unwinding profitable long NZD positions against the AUD i.e. independent NZD selling. |
| • Standout improvement in the NZ Government’s fiscal position. | • Aussie equity fund managers reducing NZ share investments due to uncertain regulatory risk in the telecommunications and energy sectors. Also to realise NZD/AUD FX gains. |
| • NZ’s Terms of Trade Index remaining at record highs. | • Asian investors in NZ Government Bonds reducing their holdings as bond yields increase and the USD strengthens. |
| • Potential major boost for NZ’s economic fortunes if viable volumes of oil and gas are found from the exploration taking place in the Great South Basin by Anadarko and Shell. | • Potential increase in NZ political risk if the Labour/Greens improve in the opinion polls. Foreign investors will reduce NZD weightings as stated Labour policy changes for the RBNZ will worry them. |
| • NZ’s reputation risk dented by Danone suing Fonterra over the contaminated milkpowder scare that wasn’t. | |
| • Global sharemarkets moving sideways/down as tapering is implemented i.e. “risk-off” mode. | |
| • A weakening Euro against the USD as the ECB increase monetary stimulus. |
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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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