By Roger J Kerr
In the immediate future, the FX markets seem to have no real reason to be selling the Kiwi dollar lower as the economic fundamentals for us remain positive and the US dollar itself is not exactly on a big strengthening move.
From a technical trading aspect the NZD/USD spot rate has closed below the 50-day moving average around the 0.7250 area, however has not really tested below the longer-term, 200-day moving average at 0.7180.
The Kiwi has reversed engines back upwards again from 0.7180 on two occasions over the last month (on 8th February and 1st March).
There has been no fresh negative news for the Kiwi dollar on its own to be the spark of a more concerted sell-off below the 0.7180 support level.
In the very short-term, this Thursday’s release of the GDP growth figures for the December 2017 quarter has the potential to be the catalyst to drive the Kiwi dollar lower.
Consensus forecasts are for another 0.6% expansion over the quarter, however a number below this due to some hesitancy in the business community just as the new Government came into power could stimulate Kiwi dollar selling.
On the flipside, primary industries, construction, manufacturing and services sectors all appeared to have reasonable growth through that period, therefore it would be something of a surprise if the result turned out to be substantially weaker than expected.
Over the medium term of three to 12 months forward, the case for a marginally weaker NZ dollar may be substantiated on the back of anticipated lower foreign capital inflows.
Over recent history, two important variables that tend to push the NZ dollar higher have been rising house prices and rising agricultural commodity prices.
Foreign investors buying Kiwi dollars to buy NZ real estate had been a positive for the currency up until six months ago.
The rebound higher in dairy and other commodity prices from the lows of mid-2015 has certainly been the main contributor in the appreciation of the Kiwi from 0.6400 to 0.7400.
The situation today is that the outlook for housing and commodity prices is that both are already at high points in their cycles and are starting to level off as the pundits’ question how much higher they can run.
The slowdown in foreign capital flooding into our property market due to regulatory restrictions removes a previous positive force for the Kiwi dollar.
Foreign direct investment/capital inflows have also been a positive for the Kiwi dollar over recent years.
Offshore companies buying NZ businesses and Chinese interests building dairy processing factories have also required buying of the Kiwi dollar.
That picture has changed in recent months with many observing a tightening up on approvals by the Government’s Overseas Investment Office to foreign buying of local businesses and land.
The signals going out to foreign investors is that New Zealand is now less inviting when it comes to regulation and bureaucracy.
Adding to the slowdown in offshore capital inflows is the increases in US interest rates make New Zealand-listed dividend stocks relatively less attractive form a yield enhancement perspective to overseas portfolio investors.
Stronger employment data in the US over February suggests that the Federal Reserve are on track for definitely three and maybe four 0.25% interest rate increases this year.
Their expectation is that wage increases will follow to stronger demand in the US labour market, thus higher US inflation.
Over coming weeks, I would expect the global currency markets to belatedly reflect this economic reality with the US dollar strengthening to $1.2000 against the Euro (currently $1.2300). Such a movement would pull the Kiwi dollar below its current 0.7180 support area.
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.