By Roger J Kerr
Just when it looked like the Kiwi dollar had stabilised in the 0.6800/0.6900 region after the politically induced sell-off through September and October, the currency has been caught in an Australian dollar downdraft.
Heavy selling of the Aussie on Friday 17th November in US foreign exchange markets pushed the AUD/USD exchange rate down one cent from 0.7650 to 0.7550.
The sudden selling pressure seems to have come from currency speculators unwinding long AUD position held in US futures markets.
Up until recently there were record high long AUD positions held and when the AUD failed to hold above 0.8000 against the USD a few weeks back, those position holders have finally been forced to close-down resulting in AUD selling.
Political uncertainty in Australia would not have been helping the cause either.
The NZD/USD exchange rate hit a low of 0.6781 on Friday night and has recovered a little to 0.6815.
The Kiwi dollar does follow the AUD closely so it cannot be too surprising that the NZD/USD rate falls away when the AUD is slammed in the FX markets.
The overall TWI Index has dropped away to 72.20, the lowest level in 18 months and considerably below the level assumed by the RBNZ for their 2018 inflation forecasts.
Herein lies the reason why I do not expect the NZ dollar to be sold a great deal lower.
The FX markets will at some point over coming weeks/months start to factor in the increasing likelihood that the RBNZ will need to bring forward their timing of the first OCR increase in 2018 as inflation (current and future forecasted) tracks higher than their expectations.
The forex markets will not be waiting for the RBNZ to confirm this change in timing in monetary policy settings, they will pre-empt the RBNZ action six to nine months in advance by pushing up the Kiwi dollar straight away.
Therefore, it is a great time for exporters to be hedging to higher percentages by buying forward the Kiwi dollar.
Some initial evidence last week that the change of Government is not going to cause consumer and business confidence to fall away and lead to a major economic slowdown.
Consumer confidence only reduced slightly in October and remains near to historically high levels.
The manufacturing PMI survey also remained at very positive levels above 57.0.
The underlying economic fundamentals remain pretty robust for the NZ dollar and there is nothing really to suggest that GDP growth is not going to continue in the 2.5% to 3.0% area over the next couple of years.
The Government’s half-year economic and fiscal update in early December will be the next official forecast on the economy to be released.
Bank economists are sitting on the fence, a bit like the RBNZ, on the economic outlook with several citing upcoming “headwinds” for the economy slowing GDP growth.
For my part I do not see much evidence of what those headwinds will be.
Apart from a recent pullback in whole milk powder prices, there is no evidence that other export commodity prices are about to experience a major fall.
Global GDP growth is currently being revised upwards by all and sundry, so demand for our exported protein should be positive for prices.
The Global Dairy Trade auction results this Wednesday morning will be an important lead-indicator on WMP prices after decreases over the last three auctions.
The WMP dairy futures are now pricing back above US$2,900/MT, above the US$2,850/MT result of the last GDT auction.
A recovery in WMP prices to back above US$3,000/MT over coming weeks should be positive for the Kiwi dollar.
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