Opinion: FX market ignores Bollard’s interest rate prognosis

By Roger J Kerr The "non-response" (so far!) by the NZD forex market to the RBNZ's extraordinary new approach to monetary policy management tells you something about how unconvincing the RBNZ stance is, or maybe the lack of trading/speculative interest in the NZD currency at this time. Although US:NZ interest rate differentials are a key driver of the NZD/USD value, they are not the only driver. Movements in the USD generally can over-power local interest rate and economic developments. Having said that, we are still of the view that the NZD/USD rate will visit the low 0.5000's for a period before it is able to make more permanent gains to above 0.6000 later in the year when our economy and interest rates are moving up ahead of other countries. One could understand overseas players (if there are any left!) in the NZD currency market being somewhat confused at the flip-flopping statements coming out of the RBNZ over recent months. In early March Alan Bollard muses that our capital markets must remain internationally competitive (i.e. NZ interest rates cannot go too far below those of Australia as we still need to attract voluntary capital inflows to fund the Current A/c deficit), however in late April they almost command interest rates to stay at super low levels for 18 months based on some new-found concern for the domestic economy. The irony is that there have been clear signs over recent weeks that the recession may be past its worst and consumer/business confidence is improving. Perhaps the overly-gloomy (and out-of-date) OECD report spooked the RBNZ as well. What does all this mean for the NZD/USD rate over coming weeks? - more likely to be down rather than up in my view when the offshore parties really think about what is going on here. That's for the short-term, in the medium term we see the Kiwi recovering to above 0.6000. Exporters must have their staggered NZD buy orders in with their bankers from 0.5500 down to 0.5000. For the sake of general currency stability which everyone wants, I just wish the RBNZ would stick with their own consistent view of the economy and not seemingly be swayed to continuously change their view depending on what the bank economists, the QSBO, the OECD or what anyone else is saying. The NZ economy and the households/businesses within it would be a lot better of with a stable interest rate regime between 5% and 7% that would automatically reduce exchange rate volatility. Gyrations between 9% and 2%, no matter what the local and global economic circumstances are just reduces investment and thus wealth. "”"”"”"”"”- * 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