By Roger J Kerr
The NZD/USD exchange rate is currently pressing the bottom-end of the 0.7700 to 0.8000 trading range that has been firmly established over recent months since the fall from 0.8800 to 0.7800 in August/September.
Three factors have brought about the depreciation from rates above 0.7900 two weeks ago:
- A sharply weaker Australian dollar against the USD – continuing price reductions in metal/mining prices and several global investment banks now forecasting interest rate cuts in 2015 by the RBA from the current 2.50% OCR level are behind the AUD selling in the FX markets. The AUD/USD exchange rate continues to slide, falling below 0.8300 at the time of writing.
- A stronger US dollar against all currencies on international currency markets – Last week’s extraordinarily strong jobs growth number of +321,000 for the month of November (prior forecasts = +230,000) confirms the robust economic expansion in the US and brings forward the timing of Federal Reserve interest rate increases in 2015.
- International dairy prices decreased again at last week’s Fonterra GDT auction – Wholemilk powder (WMP) prices are back at USD2,200/MT after there were some tentative signs that prices were starting to stabilise. Reports continue of inventory overhang in China and until this backlog is cleared it will be difficult for WMP prices to recover.
Against this backdrop of negative forces against the Kiwi dollar, it has to be expected that the previous resistance at 0.7700 will fall away.
While the New Zealand economy is outperforming others by a considerable margin at this time and our interest rates are well above other western economies, there is no further interest from offshore hedge funds or carry-trade investors to buy the Kiwi dollars due to the time of year and the pressure the neighbouring AUD is under.
In the absence of specific Kiwi dollar buyers in the FX markets, the NZD/USD rate will move in response to general USD movements against the major currencies.
Stronger US economic data and the Europeans contemplating further monetary stimulus has the USD making significant gains against the Euro over recent weeks.
The USD strength is fully justified and has been widely forecast for some time; therefore it can be no great surprise that the NZD/USD rate is lower due to USD appreciation.
What is more important is to look ahead and consider the influences on future NZD/USD direction, past movements can be read about in the newspaper.
In the very short-term two announcements this week on will provide specific and separate impact on the NZD/USD exchange rate:
- Following a Board meeting Fonterra are expected to update their 2014/2015 milksolids payout forecast to their dairy farming suppliers. Some are forecasting a reduction from $5.30/kg to just $5.00/kg, however current WMP prices and Fonterra’s hedged NZD/USD currency position would suggest a much lower figure towards $4.70/kg is warranted. If Fonterra lower the forecast to $4.70/kg the Kiwi dollar could be expected to weaken as it does reduce incomes in our major industry and thus overall GDP growth.
- The RBNZ deliver their quarterly Monetary Policy statement on Thursday 11th December and should continue with the rhetoric that the NZ dollar is unjustifiably high. Even though the NZD/USD rate has depreciated 12.5% since 0.8800, the overall currency value as measured by the TWI Index is only down 5% at 78.03 from the year’s high of 82.03. A dovish-leaning message from the RBNZ will be NZ dollar negative.
Looking further ahead into 2015, the debate will continue as to when the OCR is increased again to take the current 3.50% OCR to the desired “neutral” level of 4.50%.
RBNZ Governor Graeme Wheeler would ideally like NZ interest rate increases in the second half of 2015 to coincide with US interest rate increases by the Federal Reserve.
In this manner he does not unnecessarily push up the NZD/USD rate and penalise the export sector.
The NZD/USD rate appears headed for a lower trading range between 0.7500 and 0.7900 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