By Roger J Kerr The NZ dollar FX market is again pushing the currency right up to the major resistance levels of 0.6900. The Kiwi has encountered profit-taking and selling at this level on several previous occasions over recent weeks. Whether there is sufficient positive sentiment and confidence in the market to keep buying the Kiwi above 0.6900 remains to be seen. I doubt it, for the following short-term and more long-term fundamental reasons:-
- The RBNZ Monetary Policy Statement on Thursday should cause some re-assessment by long-NZD position holders as the outlook on the NZ economy will not be as positive as they expect.
- At some point, sooner or later offshore traders and investors in NZ Dollars will realise the big differences between the NZ and Australian economies at this time. The Aussies will be increasing their official interest rates in 2010 a long time ahead of New Zealand.
- Global banks such as Standard Chartered, Barclays Capital and Merrill Lynch/BofA who have been buying the Kiwi up (and advising their investment clients to do the same) in expectation that New Zealand will be the first economy to unwind the loose monetary conditions will be bitterly disappointed at the RBNZ's MPS this Thursday. They will sell the Kiwi in disgust that the RBNZ official view is so different to their own.
- Over coming weeks the global equity and commodity markets are expected to correct down as they reassess the sustainability of recent price gains. Weaker commodities and sharemarkets will be positive for the USD, negative for the Kiwi on the increased investor risk aversion factor. As the G-20 Ministers stated over the weekend, the global economy may be past the worst, however it is going to be a slow/hard struggle back to positive growth. The markets have become far too ahead of themselves on this score and a correction down is inevitable.
- The June quarter GDP figures released at the end of this month will be nowhere near the +0.4% Australia recorded for the June quarter.
- Stronger imports/home mortgage borrowing and weaker exports due to the higher NZD value will stop the Current A/c deficit improvement and potentially force the credit rating agencies to downgrade New Zealand's sovereign rating. The markets have seemingly forgotten or dismissed this real risk for the Kiwi.
The NZ dollar exchange rate has a very direct and material impact on the performance of the NZ economy. In my view this fact has been conveniently forgotten about in the almost euphoric relief out there that house prices are no longer falling and could improve. Alan Bollard is set to send the markets a dose of reality on this fact on Thursday morning. "”"”"”"”"”- * 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
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