Opinion: NZD short position holders squeezed out

By Roger J Kerr The NZ dollar has yet again rebounded upwards from a brief dip below 0.5000 against the USD. The overall Trade Weighted Index ("TWI") has also recoiled upwards as well, to 53.50 from lows of 51 over recent weeks. There is no question that offshore players in the NZD forex market went into last week's RBNZ Monetary Policy Statement holding short-sold NZD positions in expectation of a 1.00% OCR cut. The 0.50% OCR reduction to 3.00% would have disappointed these particular currency traders, causing them to buy back their NZD positions.

The lift to 0.5250 has also been aided by a marginally weaker USD against the EUR. The local financial markets had come around to pricing a 0.75% cut by the time of the RBNZ announcement, but overseas traders not so close to the action would have been surprised that the RBNZ was not as negative on the outlook. Reading between lines of the coded messages from Governor Bollard on the need for New Zealand to "maintain its competitiveness in the capital markets", interprets to mean that there are dangers in New Zealand taking its interest rates too far below those of close neighbours, Australia. New Zealand still needs to attract billions of dollars of voluntary capital inflows each year to fund the massive external current account deficit. Those funds will naturally go to Australia instead of New Zealand if their interest rates are materially above ours. The RBA is in pause mode at 3.25%, 0.25% above our 3.00% OCR. Governor Bollard is also acutely aware that the NZ dollar would be under further severe downward pressure if we dissuade what foreign capital inflows that might be around. Investors, importers and exporters do not need further depreciation or volatility in the currency at this time, and it appears the RBNZ now understand that currency stability is the best outcome to assist the economy to recover. The appreciation of the Kiwi since the MPS statement does underline this reality of NZ's dependence on foreign capital flows. In some respects we are starting to see a floor develop under both our interest rates and currency. Since the credit and banking crisis struck global financial and investment markets, the trading levels and interest from foreign players in the NZD currency has reduced significantly. What across-border capital flows are occurring is therefore now more likely to have an impact on the price (the NZD/USD exchange rate) in a much less liquid forex market. ---------------- * 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