By Roger J Kerr
The sting has come out of the Kiwi dollar’s upward momentum over recent days.
Evidence of the waning interest to buy and hold the NZ dollar was seen last week when the Kiwi failed to follow the AUD higher when stronger than expected Aussie jobs numbers were released.
The NZD/AUD cross-rate decreased from above 0.9300 to 0.9200 as a result.
The absence of NZD buying was due to the warning shoot aimed at the FX markets by the RBNZ a few days prior where Governor Wheeler stated that intervention to sell NZD’s would be “opportune” should the rising Kiwi continue to diverge away from its economic fundamentals i.e. falling export commodity prices and terms of trade.
The NZD/USD exchange rate has retreated to 0.8600 after reaching highs of 0.8780 on 6 May.
There is potentially a further sting in the tail for the Kiwi dollar this week with the delivery of Australian Government budget on Tuesday 13 May.
A severe tightening of fiscal policy is expected and required in Australia to rein in a AUD50 billion blowout in this year’s Federal budget deficit and a projected AUD30 billion deficit for the year to 30 June 2015.
While seemingly a loss of control in Australian Government finances has occurred, the reality is that Australian Government debt as a percentage of GDP remains one of the lowest in the Western world.
Nevertheless, a much tighter fiscal policy may lead the financial markets to conclude that the RBA will be under increasing pressure to compensate the economy with an off-setting looser monetary policy.
Whatever way the austerity measures are interpreted, the conclusions from the Australian budget this week will have to be negative for the Aussie economy and thus negative for the AUD in the currency markets.
The Aussie interest rate markets are only pricing in very small increases in their OCR over the next two years, after the budget they may well start to price-in the possibility of interest rate cuts to help the Australian economy recover out of its current doldrums.
The RBA has previously stated a preference for the AUD/USD exchange rate to be nearer 0.8500 to support GDP growth in the post-mining boom era.
Overall economic performance since would not support the RBA being all that comfortable with the current exchange rate at 0.9350. A lower AUD/USD rate over coming weeks will pull the Kiwi dollar down with it.
There is now considerable focus on the RBNZ’s 12 June Monetary Policy Statement as a lead to future NZD/USD exchange rate direction. If the FX markets maintain a strong Kiwi dollar with the TWI Index over 80.00 over the next four weeks, the RBNZ would be under considerable pressure to deliver on their threat of FX market intervention.
Everyone knows that direct selling of the Kiwi dollar is using a peashooter against an elephant and is unlikely to have any impact.
However, the RBNZ Governor has a far more potent weapon at his disposal in the form of surprising the markets by cancelling the previously signalled third 0.25% OCR increase scheduled for June.
The Kiwi dollar could plunge by two to three cents in response to a surprise “no hike” decision on 12 June.
There is no question that the higher than expected NZD value through the first part of 2014 must cause the RBNZ to lower their current inflation forecasts for 2014/2015.
Likewise, the sharply lower Wholemilk Powder prices without a corresponding NZ dollar depreciation forces the RBNZ to lower their GDP growth forecast for the same period.
The conclusion is that the current RBNZ guidance on the extent and timing of OCR interest rate increases will need to be revised lower due to the changing economic events and developments since March. The RBNZ may decide to still increase the OCR on 12 June, however clearly signal to the markets that future OCR increases in 2013 are much less likely due to the inflation risks reducing.
In the meantime, events in Australia and a stronger US dollar globally over coming weeks that drive the Kiwi dollar lower in the markets may save the RBNZ from having to make a brave decision on 12 June.
The European Central Bank has provided a firmer indication that they will cut their official interest rates to zero and embark on unconventional monetary policy stimulus measures (i.e. European style quantitative easing) in June.
The Euro exchange rate has already weakened from $1.3950 to $1.3750 over recent days and seems set to reduce further towards $1.3000 when the policy initiatives are announced.
The US economy continues to expand, even though Janet Yellen at the Federal Reserve appears overly cautious about how robust the improvement in employment really is. Over coming months the FX markets should mark the US dollar stronger against all currencies as the evidence of superior US economic performance transpires.
While the NZD/USD rate has remained above 0.8500 for longer than anticipated a few months back, the current changing circumstances with the NZ economy, the Australian budget, renewed Euro weakness and general USD strength all add to further Kiwi depreciation towards 0.8000 over coming months.
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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
Roger,
You say: Everyone knows that direct selling of the Kiwi dollar is using a peashooter against an elephant and is unlikely to have any impact.
I don't know this, so I'm clearly not part of "everyone". In fact given the RBNZ has an infinite quantity of NZD at its disposal, it clearly has a bazooka. The markets seem to treat the RBNZ with disdain because it rarely ever uses its bazooka, and never loads it up with decent ammo when it does.
But has it, it does, and one decent shot, and in my view the elephant would run for the hills.
Yeah why not, invest it in US treasuries. Nice little earner for the RBNZ.
And if the RBNZ ever feels the NZD is undervalued and wants to support it, then it has some foreign reserves to sell, though playing that side of the game it's easy to run out of USD before the rest of the market does.
The media often report that it's a fools game for a central bank to intervene in the currency markets and that the bank always looses. But where are the examples of a central bank loosing when it is selling it's own currency? The only failuresi can think of involve the central bank trying to support its' currency.
Certainly the Japanese Central bank has been very successful lowering their currency.
https://nz.finance.yahoo.com/echarts?s=JPYUSD%3DX#symbol=JPYUSD=X;range…
Quite possibly true Kimy, lets double/triple down is the way to go according to some. It never ceases to amaze me that, despite the obvious concern that the RBNZ has with the 10-15% over valued NZD, some still think that they something possess some unique magical solution that the RBNZ wasn't aware of, or hadn't researched to death in search of a solution. Their attitude is, I know better, it will work if we print more NZDs selling them into the market and boost our coffers with more useless USD's or whatever.
"Small amounts" Stephen ? maybe if perfectly timed under the guide lines that the RBNZ has set for itself through research and experience, but how long does that small amount impact the currency for - been done before several times in the past, and we're close to record highs, not exactly a solution eitherway however much the RBNZ tries to intervene, and the RBNZ knows it thank God.
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