By Roger J Kerr
The positive and negative forces playing out in the foreign exchange markets for the NZ dollar continue to be evenly balanced.
The consolidation of the NZD/USD rate in the mid 0.7000’s region is developing as expected (from previous editions of this column).
Also, not unexpectedly the Kiwi dollar is outperforming other major international currencies against the generally stronger US dollar.
The NZ dollar is higher on all the cross-rates against the Euro (0.6950), the Japanese Yen (90.20), the UK Pound Sterling (0.5090) and the Australian dollar (0.9770).
The overall Trade Weighted Index (TWI) remains at elevated levels above 79.00, despite RBNZ attempts to jawbone the currency value lower.
One way the RBNZ could drive the TWI value lower would be to cut the NZ OCR interest rate. However, judging from the RBNZ’s own economic outlook in their last Monetary Policy Statement in early March the prospect of interest rate cuts seems very remote as the RBNZ cannot hide form a strong economy.
There is no question that foreign investors continue to see New Zealand as a safe and secure destination for their funds and these inflows do underpin the currency’s value at current levels.
Global fund managers and hedge funds do seek alternative currencies to invest into to diversify some positions/asset allocations away from the US dollar which has strengthened by over 20% over the last nine months. New Zealand is regarded as a preferred target for those speculative flows, ahead of Australia, due to the higher interest rates here and superior economic performance.
It is not just short-term speculative hot money that is attracted to New Zealand and thus our dollar. We have seen sizable Chinese direct investment into the dairy industry over recent years.
The re-insurance capital flows into the Christchurch rebuild has also underpinned the currency through the last four years.
News this last week that the Singaporean sovereign wealth fund, GIC has invested over NZ$1.2 billion into property development ventures in Auckland’s downtown Wynyard quarter is another example of the yield and growth attraction.
Not that all the capital flows in and out of New Zealand are one way. Our larger institutional investors such as NZ Super Fund and ACC will be taking advantage of the high NZ dollar cross-rates to counter-cyclically buy under-valued investment assets in Australia, Japan and Europe.
Earlier this year NZ Super Fund combined with Infratil to buy retirement village operator, Retire Australia in an AUD640 million deal. They cited the high NZ dollar value against the AUD as one aspect that made the investment an attractive proposition.
While the NZD has posted gains to highs of 0.7685 on two occasions over this past week, it is apparent that the short-term traders in the NZ dollar are not all that comfortable buying the Kiwi at the elevated levels. Two events/announcements over this coming week may well act to recoil the Kiwi dollar (currently at 0.7560) lower to the mid-point of the now well-established 0.7200 to 0.7600 trading range:-
•The Global Dairy Trade auction on Wednesday morning may well see lower dairy prices again following the sharp decline at the last auction. Fonterra are submitting increased volumes to this auction. Potentially NZ dollar negative.
• Easter Saturday morning could well see the US jobs numbers for March record an increase above prior market forecasts of +250,000. If this is the result then further US dollar strength is likely i.e. NZD/USD exchange rate lower.
Looking further ahead into April, the CPI inflation numbers for the March quarter being released on 20 April may see close to a negative annual figure and thus stimulate further beating of the drums in the media for the RBNZ to cut interest rates.
The RBNZ are not looking backwards on inflation, but 12 to 18 month forward on likely future inflation levels and risks. Nevertheless, a potential negative number is likely to cause some short-term NZ dollar selling.
Upbeat US economic data continues to support the first Federal Reserve interest rate lift in July/August. However, recent price action in the EUR/USD exchange rate tells us that the FX markets have already priced this change into EUR/USD rates which are now stabilising in the $1.05 to $1.12 region.
Global commodity prices (including crude oil) are also displaying signs of stabilisation, which may also tell us that the US dollar’s gains over the last nine months may have already run its course.
The prospect of the Kiwi dollar being pushed below 0.7000 (never the view of this column!) due to another wave of general US dollar strength has arguably diminished over recent weeks.
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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