By Roger J Kerr
The NZD/USD exchange rate climbed to a high point of 0.7480 in early September on the back of a sudden and significant recovery in dairy commodity prices.
However, since that time the direction has been sharply downwards with signs of the classic pattern of up the staircase over the last 12 months from 0.6400 to 0.7400, followed by a plunge down the elevator shaft.
The early stages of the freefall was punctuated last week by a minor rebound and recovery from a low of 0.7075 on 16 October to trade up to 0.7255 on 20 October.
The halting of the elevator descent in the 0.7100/0.7200 area appears to be temporary at best, with continued US dollar strength in offshore forex markets returning the Kiwi dollar to the downward momentum over recent days.
Crucially, the short-lived NZ dollar recovery last week to 0.7255 petered out at the 50-day moving average resistance line.
Speculative sellers have returned to take on fresh short-sold NZ positions, sending the rate lower again.
The next support line for the Kiwi dollar on the charts is the 200-day moving average at 0.6950.
A break below that level over the coming period will signal a very negative outlook for the NZ dollar from a technical/chart perspective.
Just how far the rapid depreciation in the Kiwi dollar against the USD will extend to is not yet clear.
A return to the mid/low 0.6000’s would require considerably additional US dollar strength on the global stage against all currencies.
The US dollar has already appreciated 3.5% from $1.1300 to below $1.0900 against the Euro over recent weeks as the probability of US interest rate increases from the Federal Reserve in December firms up.
Once the US Presidential Election risk element for the FX markets is over on 8th November, the way should be clear for the US dollar to make further gains to the $1.0500 area against the Euro.
Another 3.5% general appreciation of the US dollar would have the Kiwi dollar 2.5 cents lower to below 0.6900.
Further Kiwi selling to the 0.6800/0.6700 region would have to be expected on the decisive breaching of the 200-day moving average point of 0.6950.
Whilst the short to medium term direction of the NZD/USD exchange rate is clearly downwards, the longer term outlook is much more positive through the second half of 2017 and into 2018. Therefore, local exporters receiving US dollar receipts will need to be well prepared to hedge forward their currency risks if and when the 0.6800/0.6700 spot entry rates are achieved over coming months.
The reasons for the more upbeat assessment of the NZ dollar’s prospects in the longer term hinge on superior economic performance and potentially rising interest rates:-
- The global supply/demand equation for New Zealand’s key commodity, wholemilk powder (WMP), remains firmly positive for further price increases to the USD3,500/MT level during 2017. The Kiwi dollar’s correlation to WMP price movement remains in place.
- Once the RBNZ cut the OCR once or twice more this year, the next move in the OCR after that in the second half of 2017 is likely to be upwards. The first move up in the OCR in 2017 may come sooner than most expect if oil prices continue their recovery to US$60/barrel and New Zealand’s annual inflation rate jumps up very rapidly from +0.2% to over +2.00%.
- New Zealand’s economic expansion looks set to continue at a robust pace above a 3.00% GDP growth rate in 2017/2018. It is difficult to see the NZ dollar being continually sold when our economy is outperforming others by a wide margin.
Under the proviso that the US dollar does not appreciate to below $1.0000 against the Euro next year, the NZD/USD exchange rate based on the aforementioned positive medium to longer term forces could easily be back above 0.7500.
However, in the short-term the currency markets will be focused on the messages from the RBNZ that accompany their widely expected decision on November 10 to cut the OCR to 1.75%.
The RBNZ cannot afford to give any inference (as they did in December 2015 that sent the NZ dollar higher) that the 10 November cut will be their last cut. Their forward guidance to the markets has to be emphatic that inflation is too low in New Zealand and a lower exchange rate is the only way to push it upwards. The message to the markets has to be that even further cuts to the OCR below 1.75% are likely to achieve that objective.
If the RBNZ fail to convey these signals, the Kiwi dollar will rise as the markets always look forward and will conclude that 1.75% is the bottom for the OCR and the next movement is upwards.
RBNZ Governor Wheeler (finally!) has the global currency market conditions with a strengthening US dollar that he has been waiting for all year.
As the direction and momentum for the Kiwi dollar is now downwards, the RBNZ have the opportunity to choose their words carefully to nudge it even lower to achieve their mandated inflation objectives.
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Roger J Kerr contracts to PwC in the treasury advisory area. 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
4 Comments
Our economy is cruising along nicely. Employment is - generally speaking, not a problem, despite immigration at peak. FHB's are able to get into their own homes - yeah yeah but when interest rates rise, there will be a rise in mortgagee sales - as if we are lending willy nilly and we know how tough it is to get funding with 5-10% deposits-- why do we want to talk as if our economy, relative to other developed economies is in such deep trouble that we want to get poor and lower our dollar right into the basement?
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