By Roger J Kerr
The NZD/USD exchange rate has traded to the upper-end of its newly established 0.7200 to 0.7600 trading range over recent weeks.
There appears to be considerable resistance to the Kiwi dollar moving above, and holding, levels above 0.7600.
There has been resistance and selling interest in the past at the 50-day moving average line and currently that line is precisely on 0.7600.
The NZD/USD exchange rate retreated from 0.7600 rather quickly last week when stronger than expected Chinese economic data (positive for commodity prices) pushed both the NZD and AUD briefly higher.
Looking ahead over coming months, there are numerous positive and negative influences on the NZ dollar exchange rate direction, which all combined together suggest that the 0.7200 to 0.7600 trading range is more likely to hold as is, rather than break-outs at either end.
The negative forces or potential risk events that would work to push the NZD/USD exchange rate lower over coming months are seen as:
- Renewed US dollar strength on global FX markets – After strengthening 18% against all currencies over the second half of 2014, the USD has stabilised over recent months. Superior US economic performance and rising interest rates in the US later this year set against money printing in Europe points to continuing USD gains, albeit not at the rapid rate seen from June to December 2014.
- RBNZ talking the NZ dollar down – The next RBNZ Monetary Policy Statement on 12th March is likely to see Governor Graeme Wheeler again jawboning the currency lower with a repeat of the previous “unjustifiably” and “unsustainably” high message. Whilst the NZD is lower against the USD, the overall TWI Index at 78 is well above RBNZ assumptions. Actual OCR interest rate cuts are not likely unless the NZ economy suddenly dives.
- The summer drought in the agricultural sector deteriorates – Adverse climatic conditions (i.e. a drought) caused the last economic recession in New Zealand in 2008. A continuation of no rain down the east coast of the country through the autumn months would reduce agricultural production and lower overall GDP growth. The NZ dollar would suffer on this event risk as the prospect of OCR cuts would loom on the much lower growth outlook.
- Disinvestment by offshore portfolio investors – The NZ sharemarket has continued its spectacular gains over the last two years. However, there will come a time soon when foreign investors into NZ shares conclude that at 20 times earnings multiples our market is over-priced. Foreign share investors unhedged against the NZD depreciation to the USD over the last eight months may well decide that it is time to exit, thus they are sellers of the NZD.
- NZD over-stretched position against the AUD – With the cross-rate approaching 0.9700, the NZD on various scores is well over-extended against the AUD. Speculative position taking, selling AUD/buying NZD, has driven the NZD/AUD rate higher and the unwinding of those positions (as happened 12 months ago) seems likely to drive the NZD/AUD rate back to 0.9200 again. Interest rate differentials between the two currencies continue to suggest a 0.9200 level as more sustainable.
To some degree the aforementioned negative variables are counteracted by the continuing positives for the NZ dollar:
- Interest rates remain well above the rest of the world – The 3.50% yield advantage of investing in NZ dollars (compared to most major currencies) continues to underpin and support the value of the NZD/USD in the mid-0.7000’s region.
- Recovery of dairy prices – The dramatic rebound in wholemilk powder prices (WMP) over the last month should be sustainable with constrained product supply. The previous wide gap between the NZD/USD rate and WMP prices has suddenly closed up with the WMP price increase and lower NZD/USD rate. The currency value is back in line with the major commodity.
- House prices, immigration and inflation – The various economic forecasters predicting that our annual inflation rate will remain below 1.00% this year appear to be out of step with reality. Prices of imported consumer goods are already increasing due the 18% NZD depreciation against the USD. House price inflation and construction sector inflation continues to increase. Whilst OCR increases for 2015 have currently been dismissed by almost everyone, the economic data over coming months may well cause some reassessment.
The upshot is that the NZD negatives marginally outweigh the positives, however, not in sufficient force to propel the NZD/USD rate below 0.7000 anytime soon.
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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