Opinion: Strong Aussie economy lifts Kiwi back to 0.7400

By Roger J Kerr Increases in global sharemarkets and commodity prices over the Christmas/New Year period have been good news for the Australian economy, as well as stronger retail and employment data in the "lucky country", have all led to independent AUD currency strength which has pulled the Kiwi dollar higher. The NZ GDP growth numbers released on 23 December had to be a negative to shock the FX markets into selling the Kiwi on its own. But, while the +0.2% growth in the September 2009 quarter was well below prior concensus forecasts, it was not sufficiently negative enough to prompt Kiwi selling below 0.7000. The NZD gains to 0.7400 yet again have nothing to do with the NZ economy or its performance, the NZD merely dragged up by the out-performing AUD and currency punters prepared to take on more risk with sharemarkets up. The 5% AUD and NZD gains against the USD over the last three weeks have far exceeded a USD weakness against the Euro. The USD itself has been largely stable after the gains it made on book-squaring in late 2009. Even though there are still big challenges in front of the US economy with a 10% unemployment rate, the US economy looks a great deal better than Europe moving into 2010. There is no fundamental economic reason for the Euro to strengthen against the USD this year and do not be surprised to see a few financial/investment shocks coming out of Europe. The current NZD/USD divergence away from the EUR/USD rate appears unsustainable to me (see chart), so do not expect the Kiwi to hold onto its recent gains to 0.7400. Weak economic data and low inflation data from the domestic NZ economy will be negative for the Kiwi dollar over coming months. So will a bulge in uridashi and euro-kiwi bond maturities, $6 billion of which come up in the next 90 days. However it requires a stronger USD on the global stage to get the Kiwi back below 0.7000. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. 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