By Roger J Kerr
Two factors have conspired to thwart the view that the NZD/USD exchange rate would track down to 0.8000 and below through this period:
- Last week the RBA (as we expected) shifted their forward guidance on their monetary policy settings from an “easing” bias to a “neutral” bias as they prefer a lower exchange rate to help their economy than lower interest rates at this point.
The FX markets were clearly priced before the announcement for a continuation of the easing bias and the AUD/USD rate subsequently rebounded up two cents from 0.8760 to 0.8960. The Kiwi followed, lifting from below 0.8100 to 0.8280.
- The USD itself has not been able to make the gains we expected following the Federal Reserve’s confirmation that they are firmly on the pre-programmed reduction in Quantitative Easing (QE) i.e. tapering the monthly bond purchase amounts.
Two successive months’ (December and January) of much lower than expected employment numbers has put paid to USD advance for the meantime.
The question for the short-term outlook of the NZD/USD exchange rate is whether the two developments above are temporary blips or something more permanent in nature for the currency markets.
I prefer the latter (that is, not long lasting impacts) for the following reasons:-
- While the RBA do not want to reduce interest rates further whilst their annual inflation is tracking towards 3%, Australian economic performance and trends are still poor.
Interest rates are not going any lower in Australia and it might be 12 months before there is any hint of increase in their OCR. So no real reason for the AUD to be making gains against the USD. Base and precious metal prices are not exactly racing upwards and the slowdown in mining investment is pronounced.
Over the last 12 months the Australian economy has been found out somewhat as high cost, uncompetitive and over-reliant on hard commodity prices. Add in large budget deficits, that are now being addressed by the new Government’s fiscal austerity measures, and Australia’s overall economic outlook is not one that will be attracting new foreign investment inflows or speculative AUD buying.
While a lower currency and low interest rates really help Australia’s economic recovery, a rising AUD currency value is not what they want or need right now.
- The fact that the USD has not yet been able to strengthen against the Euro despite monetary stimulus being withdrawn in the US and likely to be increased in Europe rather defies logic.
The EUR/USD rate remains at $1.3600 and has not budged either way for several weeks. Looking forward, the odds still have to favour the USD strengthening against the Euro to $1.2000 as the bond yield differential chart below suggests.
Conclusion: The mini-rally upwards in the AUD against the USD to 0.8960 will run out of steam and a reversal back down will pull the Kiwi back to the 0.8100’s over coming weeks.
-----------------------------------------------------------
To subscribe to our daily Currency Rate Sheet email, enter your email address here.
No chart with that title exists.
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
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.