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Roger J Kerr sees further gains for the NZD especially if the US Fed delays its September rate hike. The Kiwi may have passed the bottom

Currencies
Roger J Kerr sees further gains for the NZD especially if the US Fed delays its September rate hike. The Kiwi may have passed the bottom

By Roger J Kerr

Trading patterns for the New Zealand dollar over recent weeks continue to display a stability and resilience above 0.6500 to the USD that defies the majority of currency forecasters who have been predicting further depreciation to 0.6000.

As repeated in this column consistently over the last two months the Kiwi dollar sellers are exhausted with all the bad economic and commodity price news fully priced in already.

It is no great surprise that the NZD/USD has moved higher to near 0.6700 as the speculative short-position holders slowly and surely unwind their NZ dollar bet and buy the currency back.

Without question a bounce back up in wholemilk powder prices last week and a marginally weaker US dollar on the world stage has aided that Kiwi dollar improvement.

What is highly instructive for the future direction of the NZD is the fact that the currency traded higher from 0.6500 to 0.6700 last week despite a major sharemarket sell-off in the US, crude oil prices below US$50/barrel, weaker Chinese economic data and Emerging Market currencies under considerable pressure.

Even though NZ GDP growth is currently being pegged back from above 3% to around 2%, our currency still stands out as a safer place to be in a very uncertain financial/investment market environment.

Further New Zealand dollar gains could eventuate over coming weeks if the US dollar weakens on the Federal Reserve postponing the first 0.25% interest rate increase in 10 years from the expected September timing.

The greater probability still appears to be that the Federal Reserve will make their move in September and wait for many months before doing the second 0.25% interest rate increase sometime in the first half of 2016.

The FX forecasters who are picking further NZD weakness to 0.6000 are basing their view on the US dollar automatically strengthening against all currencies when the Fed lift US interest rates. History over the last 40 years tells us that the US dollar currency value has moved both up and down in about equal proportions on all the Fed monetary tightening events. It is far from a forgone conclusion that the USD will automatically appreciate when US short term interest rates are increased.

The FX markets always price all future events in to the exchange rate today, thus rising US interest rates over the next 12 months have already been priced in, through the USD appreciation against all the major currencies over the last 12 to 18 months.

The longer the NZD/USD exchange rate continues to trade across the page in the 0.6500 to 0.6700 area, the probability increases that the bottom of the Kiwi dollar slide may indeed prove to be the 0.6500 level. 


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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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15 Comments

Not sure I buy these arguments given that the writer has appeared bullish while the NZD has fallen in rent times.
The interesting issue ffor me is around the RB monetary policy response. Given the latest inflation readings (PPI and Food, weak oil prices etc) its likely the RB will cut rates more than expected. A stable/strong exchange rate would also increase the risks of a sharp fall in the OCR. At the end of the day the economic stabilisers will have to work. Complicating the story is the increasing weakness in China and the impact that will have on the exchange rate. As a result I feel that the position in this article is particularly courageous!

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I don't buy it either. Certainly not over the 4 - 8 month timeframe. It's almost inconceivable the NZD/USD rate will be higher by the end of the year than it is now.

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Two separate articles from Roger are today arguing for a high exchange rate and high interest rates. The only problem with these predictions is that they would deliver deflation, let alone inflation of 2%. Any thought of the RBNZ hitting 2% inflation in early 2016 has long since gone with oil prices at $40, and virtually all other commodities also at multi year lows. Chinese and global surplus manufacturing capacity will exacerbate the situation.
So, we may end up with a higher exchange rate than some commentators suggest. But if so, interest rates will surely head 1% lower than they are now, unless central banks including ours get somewhat creative in how they address the current world deflationary spiral.

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NZD has dropped again this morning. Not as much as the Shanghai Composite though!

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Double post. Might be an idea to disable save button on submit?

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Remember Economics, the dismal 'science', is a branch of philosophy, not of science. The assumptions that todays economists' resist reviewing are taking the profession straight for the dumpster of history.
" As Gail has so perceptively noted, all our standard economic models are built on an unstated assumption of abundant resources, and are now failing. Debates over economic models are like arguing over the best menu selections on the Titanic."
Our Finite World

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Back at 65 handle now.. china exposed anything looking shaky and that's nzd aud. Low 60s within days if this keeps up.

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Now 63...

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As I've been reading this I wondered what positive news you must be talking about that will keep the NZD pushing toward 67 and perhaps beyond...then I was watching the currency charts and saw thw NZD/USD plummet to 63 from 65 in the space of 5mins...probably when USA opened....and the NZD/GBP rocket from 2.39 to 2.50 about as quickly...

So remind me, what's going to keep the NZD strong?

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I guess Roger figures if he keeps up his predictions, they will eventually be fulfilled. A broken clock shows the correct time twice per day.

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Dow opened 1000 pts lower.. big volatility

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Roger, what is it fundamentally that you don't get about currencies? This time we had to wait less than 18 hours for your widely publicised theory to be absolutely obliterated.

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Must be time for another leg down.

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As I've said before - NZD has a 5-handle written all over it... Roger is proving to be a great contrarian signal generator.

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