By Roger J Kerr
Drawing parallels of the NZ dollar with other currencies can be instructive for analysing likely future movements, however it can also be dangerous as what one currency does in a certain economic/market climate does not automatically hold for another currency.
However, for those who think the NZ dollar is now a stellar, stand-out and top performing currency due to our “rock-star” economy, a study of the recent (mis)fortunes of the Canadian dollar (the “Loonie”) may temper those bullish expectations.
The Loonie belongs to the same currency club as the Australian and New Zealand dollars, commodity currencies that follow global growth trends and thus they attract speculative currency traders seeking to position for the ups and downs in global investor sentiment.
The AUD and the CAD both strengthened against the USD after the GFC as commodity/energy prices increased and the USD weakened on the Fed’s QE monetary stimulus policy.
The AUD started to lose its gloss mid way through last year and has been on a weaker trend every since.
The Loonie remained strong at $1.0000 to the USD up until late 2013 on the expectation that Canadian interest rates would be increased.
The CAD has been sold down heavily in the FX markets since December, tumbling to $1.1100 to the USD, a 4 ½ year low.
Expectations of interest rate increases have been dashed by weak Canadian economic numbers, gas sales across the border to the US are down with gas prices also down due to the shale gas production revolution in the US economy and commodity prices are off generally as disinvestment form Emerging Market economies have all markets nervous right now.
The Loonie has rapidly fallen out of favour in world currency markets.
It may not look like the Kiwi dollar will suffer a similar fate in the short-term, however a postponement of our interest rate increases and falling wholemilk powder prices would turn sentiment against the NZ dollar in the same fashion as the tables turned on the Loonie.
The NZD/USD rate has broken out the bottom-side of the 0.8250 to 0.8400 trading range that held through December and most of January.
The recent depreciation to below 0.8100 caused by a combination of factors:-
- A number of FX market players clearly went into last Thursday’s OCR review by the RBNZ long the NZD in expectation of gains when the OCR was increased. That did not happen (it was never going to happen) therefore the NZD traders were forced to sell the NZD’s back to the market.
- The USD strengthened against all the major currencies when the Federal Reserve reduced their bond buying by another $10 billion per month as they signalled they would do in the progressive tapering plan. The USD also made gains as funds moved out of Emerging Market currencies.
- RBNZ Governor Graeme Wheeler stated in a post OCR review speech in Christchurch that he still considered the NZ dollar significantly over-valued and it was a major headwind for the economy. The latest jawboning down of the currency proving more effective, as the RBA have been providing the master-class of how to talk your currency value lower of late.
- As expected, the unwinding of long NZD/short AUD positions that drove the NZD/AUD cross rate from 0.9000 to 0.9400, has finally eventuated with the plunging Kiwi on its own after the OCR “no change” being the catalyst. The NZD/AUD cross-rate has pulled back sharply from highs of 0.9460 to 0.9240.
A push below 0.8000 now appears more likely for the Kiwi than a return to 0.8200/0.8300.
The USD is set to strengthen further in global FX markets as the US economy out-performs in the GDP growth stakes.
The second six months of 2013 saw the strongest half-yearly GDP expansion of the US economy in 10 years.
The EUR/USD exchange rate has come back to below $1.3500 from $1.3700 as the USD makes gains on the Fed tapering.
Very low inflation results in Europe are likely to lead to further monetary loosening measures form the ECB.
The Euro is destined to weaken substantially in 2014 as the monetary conditions in Europe move to be exactly the opposite to the unwinding of stimulus in the US.
Local exporters selling in Yen and Euro will be taking advantage of the current lower JPY/NZD and EUR/NZD cross-rates as the future risk is that the cross-rates increase significantly as the Yen and Euro fall further against the USD than the Kiwi dollar does, due to rising interest rates in New Zealand over the remainder of 2014.
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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
8 Comments
Want to see something to make yer eyes water.
Our debt is a drop in the ocean. A mere bagatelle. But I would like to see it in graphic form, to compare.
Something else to make yer eyes water.
http://www.bloomberg.com/news/2014-02-11/u-k-towns-face-more-floods-as-…
Now why do they wait for problems, before taking action.?? these so-called Leaders.
Flitting around from pillar to post, but they got us into the problems in the first place.
I prefer preventative action, if it were me.
The signs have been around for years.
Weather patterns changing.
Give em all a bucket and spade and get dredging. Plant more trees too.
Us, we need to cater for droughts and floods. Coast to Coast is different. Each to his and hers.
But we build velodromes, stadiums and monuments to egos and entertainment, not containment. And infill building and on flood plains. Dumb and dumber. No run-off.
Disaster prevention is far better than cure, in my humble opinion.
And paying for trouble, after the event is compounding the problem.
Any fool can tell you that......and just did.
"Plant more trees too."
You'd think that, but in looking for ways to subsidise farming the EU subsidises the removal of trees not the planting of them. So it against the interests of any particular farmer to plant trees.
http://www.theguardian.com/commentisfree/2014/jan/13/flooding-public-sp…
Yep, that was one of the articles I read on the subject.
My poor brother lives in Tewkesbury-under-Severn. (Luckily he is still above water).
We can send a man to the moon, we can send a politician to Davos to argue the toss of who owes what to who, we can build leaky homes and leaky schools, pay millions for a tiny plot by the sea, we can build on the banks of rivers for such a nice view.
But Mother Nature and water can defeat all man can do, it can undo it in days, minutes or seconds.
And don't get me started on wind. We all suffer from that and will do as more climate changes take place. And once politicians get in on the act, it can only get worse.
More hot air spoken, build a stadium, not a sustainable nation.
We can waste all the worlds resources, but one ounce of common sense, we cannot afford.
There are a few old adages spring to mind.
Waste not, want not.
Live within your means.
Save for a rainy day.
And if you have too much wind, buy a kite.
Seems politicians have been flying lots of those this past few years, but not much else worth having.
All they care about is flags, but I say flag that.
Concentrate on the waste of time these people are. And your money, naturally.
We may not have much time left.
We seem to import all the bad ideas from the UK , weather may be next.
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