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Roger J Kerr says retreat by the NZD has been due to unwinding of carry trades and NZD/AUD speculative positions

Currencies
Roger J Kerr says retreat by the NZD has been due to unwinding of carry trades and NZD/AUD speculative positions

 By Roger J Kerr

The FX market sentiment towards the Kiwi dollar has definitely shifted over the last few weeks and we may be witnessing the start of a classic NZ dollar “up the escalator/down the elevator shaft” scenario yet again.

The retreat from the 0.8770 high on 6 May has been relatively rapid with Kiwi dollar selling from unwinding of carry trades and also belated unwinding of long “NZD/short AUD” speculative positions entered in December/January.

The sharp fall in the NZD/AUD cross-rate to well below 0.9200 is testimony to the independent Kiwi dollar selling that has emerged.

The FX markets are finally recognising the plunge in our dairy prices and perhaps it took the much lower Fonterra milksolids payout forecast for 2014/.2015 at $7/kg last week to prompt a reaction.

The NZD/USD spot rate has dropped well below its 50-day moving average at 0.8600 and is now set to threaten the 200-day moving average line at 0.8350 (refer chart below).

Technical related NZD selling may soon be adding to the downward momentum.

Two further reasons for the Kiwi to depreciate further below 0.8400 in the short-term are both external to New Zealand:-

· The AUD/USD exchange rate is poised to move lower over the short-term for its own very good reasons (and the Kiwi should follow):-

o Aussie building approvals released yesterday were weaker than expected and retail sales released today are not exactly stellar at +0.20% for the month of April.

o The RBA interest rate review later today will hardly be upbeat on the Aussie economy with fiscal drag already raising its head in lower business and consumer confidence surveys.

o Australian GDP growth figures tomorrow (Wednesday 4 June) could well prove to be weaker than the more pessimist forecasts at +0.9% for the March quarter.

o The AUD/USD exchange rate at 0.9230 is not far above its 200-day moving average at 0.9180, thus chart-related selling could add to the downward momentum

o Iron ore prices continue to slide which is never good news for the Australian economy (see chart below).

· The EUR/USD exchange rate (which the NZD/USD rate also follows) is also poised to move lower from $1.3600 this week, provided the ECB deliver a monetary stimulus package on 5 June that meets or exceeds prior market expectations. The EUR/USD forex markets is already heavily short-sold the Euro ahead of the ECB statement, so no room for disappointment.

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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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