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Roger J Kerr sees the lack of flow-through since the OCR decision as confirming offshore investors are wary of the high NZD

Currencies
Roger J Kerr sees the lack of flow-through since the OCR decision as confirming offshore investors are wary of the high NZD

 By Roger J Kerr

The NZD/USD exchange rate appreciated to a high of 0.8600 on 13 March following a more hawkish than expected RBNZ Monetary Policy Statement.

The initial move higher on 13 March from 0.8480 to 0.8540 was due to the RBNZ projecting a slightly higher track for the OCR through 2014 and 2015 than what the market was previously expecting.

Further gains to 0.8600 came from a resurging AUD after Australian jobs increases for the month of February were substantially above consensus forecasts.

The overall measure of the value of the NZ dollar, the Trade Weighted Index (TWI) hit a post-float (since 1985) record high of 80.13 on 13 March as well, however it has since retreated back to 79.69.

The NZ dollar was always going to lift on the New Zealand central bank being the first economy in the western world to increase official interest rates from the record lows of the post-GFC era.

However, the real test as to whether all the interest rate increases forecast for New Zealand over the next two years were fully priced into the market beforehand, or not, was the currency price action subsequent to the initial positive reaction by the markets.

The fact that there has been no real follow-through buying of the Kiwi dollar over the two trading days since the OCR increase is quite instructive for future direction.

The lack of follow-through buying suggests, once again, that offshore FX speculators and hedge funds are still not keen to be Kiwi dollar buyers at these higher levels.

The NZD/USD rate has retreated back to 0.8520 as the AUD weakened off due to weaker Chinese economic data and falling copper prices.

Looking ahead over coming weeks and months, the three main pillars of NZD/USD exchange rate direction being local economic performance,  the Australian/China economic data nexus and the movements of the US dollar globally are seen as contributing the following leads:-

New Zealand economic influences:

Unsurprisingly, the immediate reaction to the RBNZ rate hike and higher inflation/interest rate forecasts was the normal tales of woe from industry/business groups of decimated profits and job losses in the manufacturing export sector.

However in stark contrast, the latest PMI measures of manufacturing performance record 18 straight months of improvement and high levels of confidence about the future.

Manufacturing exporters in USD and local import substitution manufacturers have adjusted their business models to a 0.8000 exchange rate; however a prolonged period above 0.8500 would be negative for the economy as a whole. GDP growth figures for the now historical December 2013 quarter due for release on Thursday 20 March should confirm the economic expansion with a 0.8% quarterly increase expected.

The dominant local influence over the Kiwi dollar is international wholemilk powder (WMP) prices. Increased global supply pushed WMP prices back 6% from their highs of USD5,000/MT at the last Fonterra GDT on-line auction on 4 March.

Further price decreases at the next auction this week on 18 March may start to change market opinions as to how quickly WMP prices may recoil this year. Lower WMP prices are negative for the Kiwi dollar as foreign investors now view our economy as just one very large dairy farm.

Australian/Chinese economic data:

The Australian economic picture is something of an enigma currently.

Falling mining/resources commodity prices, mining capital works slowing dramatically, weaker business/consumer confidence levels and job losses at car manufacturing companies/Qantas would all suggest an economy with major problems.

However, the official measure on new full-time jobs created in the month February was plus 80,000. The February employment increase looks to be a rogue number.

The May Federal budget in Australia should be an exercise in austerity as tax receipts tumble.

The Australian economy desperately needs a lower exchange rate to aid its economic recovery.

A three to four cent AUD depreciation against the USD over coming months should pull the Kiwi dollar down with it on the basis that all the positive economic news for NZ is already built into the 0.8500 exchange rate.

USD performance in global FX markets:

The much anticipated USD strength against the Euro has to date failed to materialise.

Weather disrupted US economic data through January and February has prevented any USD buying in global currency markets off the back of stronger US economic data.

The Federal Reserve is correctly “looking-through” the weaker winter figures and should maintain their well signalled monetary stimulus tapering plan.

The ECB now seem more concerned about deflation than inflation and thus should cut their official interest rates to zero and seek other non-conventional methods to stimulate consumer spending.

The ECB is expressing concern at the stronger Euro exchange rate at $1.3900. A stronger USD against the Euro from $1.3900 has to be much more probable than continued USD weakness.

In summary, all the positives the Kiwi dollar could possibly assimilate this year are already out in the market.

A stronger USD globally, weaker AUD and lower WMP prices from here still point to a direction towards 0.8000, rather than sustaining rates above 0.8500.

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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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