By Roger J Kerr
The Kiwi dollar appears to have again bounced back up again from rates at and below 0.7700.
In late September/early October the NZ dollar found some buying support at 0.7700 and rebounded higher form those levels.
Last week a stronger US dollar against all major currencies saw the NZD/USD rate moving below 0.7000 again. A marginally weaker than expected 214,000 increase in US jobs on October allowed for some US dollar profit-taking late Friday 7 November and the Kiwi has reversed from lows of 0.7660 to trade higher at 0.7750.
Standing back from the day-to-day noise of the market, it is clear that the NZ dollar is not under continuing downward pressure following the depreciation from 0.8800 in July to 0.7700 at the end of September.
The NZD/USD exchange rate was expected to consolidate in the 0.7700 to 0.8000 range following the 10 cent plunge and that is what has happened.
Looking ahead for the major influencing forces on the NZD/USD exchange rate over coming months, the determining factors may will lie in the answers to the following questions:
Question: Will NZ inflation remain at 1% through 2015 and the OCR remain at 3.5% in 2015 as the local interest rate markets are pricing for it to occur?
Answer: While there is a lot of talk of local inflation being dead as global inflation is currently at very low levels, the reality in New Zealand is that resource and capacity pressures will inevitably lead to price increases (particularly in the construction sector).
Tradable inflation will be increasing over the next six to nine months due to the NZ dollar depreciation and food/commodity prices can easily move up as fast as they have moved down. At some point around the second quarter of 2015 the local interest rate markets will reassess their current unjustifiable pricing of no OCR increases in 2015.
When that happens the Kiwi dollar will receive another boost of support as the New Zealand dollar will again be standing out as a currency with increasing interest rates, well above the levels of other western economies/currencies.
Question: Will oil prices (WTI) remain below USD80 per barrel, adding to global deflationary pressures, thus monetary stimulus continuing in Europe and Japan?
Answer: Falling energy and commodity prices (priced and sold in USD’s) are inverse to a rising US dollar currency value. Associated lower iron ore and coal prices are off course negative for the Aussie dollar which the Kiwi tracks. While the shale oil and gas extraction revolution in the US and Canada has been one of the reasons behind the unexpected 25% collapse in oil prices over recent months, the extraction cost for shale is not much below USD80 per barrel.
Therefore, the oil prices may be reaching a floor and the oil markets await the next supply control moves by the OPEC producers. The Russians have been pumping and selling oil at any price as they need hard currency following the plummet in the Ruble currency value and capital flight caused by the Ukraine sanctions from Europe. A stabilisation of oil prices from here should assist the Kiwi’s consolidation in the 0.7700/0.7800 region.
Question: Will wholemilk powder prices (WMP) recover to the USD3,500/MT level that Fonterra are forecasting to occur in early 2015?
Answer: Being a major player and price-maker in the globally traded WMP market, Fonterra are arguably better placed to make that forecast than anyone else. Therefore, there are reasonable odds that WMP will continue to consolidate with buyer support at USD2,600/MT as the last two GDT auctions have demonstrated.
The previous WMP negatives of Chinese inventory overhang and the Europeans selling product onto the global market that was diverted from the sanction-blocked Russian market appear to be blowing over. Fonterra will be close to the supply and demand equation going forward, therefore there must be confidence of price recovery.
Local economic data continues to be positive with employment growth, generally still high business/consumer confidence and the Christchurch rebuild in full swing.
The likelihood of any deterioration in New Zealand’s economic fundamentals over the next 12 months appears very remote.
Therefore, forecasts from some quarters of continuing NZ dollar depreciation to 0.7000 and below seems a low probability of occurrence.
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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