By Roger J Kerr
The NZ dollar is starting to display some of the traces of its all-conquering All Blacks rugby team, plenty of resilience and stamina to outlast and outmuscle the opposition, thus always win the day.
Despite numerous forecasts over recent months of the Kiwi dollar continuing its depreciation (not in this column!) to below 0.6000, the NZD/USD exchange rate remains steadfast at 0.6400.
The previous large negative factor for the Kiwi’s direction, collapsing wholemilk powder (“WMP”) commodity prices, has spectacularly reversed over recent weeks as supply has been withdrawn from the online auction sales platform.
The rapid return of WMP prices to US$2,500/MT from lows of US$1,500/MT has made a mockery of forecasts from the doomsayers that the dairy industry problems would drag the NZ economy into recession.
The WMP prices are highly volatile and are now increasing as fast as they went down.
The other previous negative forces on the NZ currency have also retreated as determining influences over recent times:-
- The anticipated further strengthening of the US dollar on global FX markets at this time has not eventuated. US economic data continues to print in a stronger vein, however the decision by the Federal Reserve last week to postpone their first interest rate increase in 10 years has depreciated the USD back to $1.1300 against the Euro. It is difficult to see the USD weakening much further, however to date we have not seen a stronger USD push the NZD/USD rate lower.
- A more dovish than anticipated RBNZ on the economic outlook and weaker than forecast GDP growth outcome for the historical June quarter should have combined to produce a lower NZ dollar. The fact is that offshore players have not sold the currency on these developments and they still seem to regard the NZ dollar as a safe and higher yielding currency in a world of still very low interest rates.
- The Aussie dollar has rebounded upwards to 0.7200 from its lows of 0.6900 against the USD. Metal and mining commodity prices are bouncing across the bottom of their big down-cycle, however critically not falling further as the commodity markets anticipate further Chinese monetary and fiscal stimulus packages to maintain their GDP growth rate at 7%. Australian economic figures, outside the resources sector, continue to improve with the new Prime Minister Malcolm Turnbull also providing a boost with more progressive economic policy initiatives expected.
On a look forward basis, rising NZ inflation, rising WMP prices and further AUD appreciation all point to NZ dollar improvement, not wholesale selling.
On a technical basis, a push up of the NZD/USD spot exchange rate to above 0.6500 would break through the 50-day moving average which the spot rate has been consistently below since early May.
On the WMP/NZ dollar correlation, WMP prices holding at US$2,500/MT point to a Kiwi rebounding to 0.6800. Since early August the overall value of the US dollar, the USD Index, has depreciated 3% from 98 to 95, whereas the NZD/USD has generally remained stable at 0.6300/0.6400. The Kiwi has some belated catching up to do on the weaker USD and also the three cent gain of the AUD over the last two weeks.
Also looking ahead, a revision upwards in Fonterra’s milksolids payout forecast for this season and an All Blacks victory at the Rugby World Cup should play their role in restoring confidence in the economy and thus currency value.
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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