Opinion: The Kiwi is not so vulnerable as the OCR cuts near the end

By Roger J Kerr I keep hearing from foreign exchange commentators and economists that the Kiwi dollar remains "vulnerable" to further selling. Vulnerability is relative to where you currently sit and what might happen in the future with hidden dangers around the corner. When the Kiwi was 0.8000 to the USD we judged it as vulnerable to wholesale selling if the reasons for holding it (high interest rates) suddenly disappeared. At 0.5000, 37.5% lower, I am not so sure the Kiwi can still be described as vulnerable to heavy selling. The negatives of lower commodity prices, lower interest rate differentials and the large current account deficit are all known and priced-in. Currency values move on fresh news and surprises. There is no fresh news on the aforementioned drivers, and I don't think we have many surprises popping up on the economy. The doomsayers have just about run out of reasons why the NZD should fall to 0.4000, but still it sits around 0.5000. Trading interest and liquidity in the NZD/USD forex market has reduced considerably. I am not advocating a bullish NZD outlook (yet!), just a view that stability around current levels is a higher probability than selling down to 0.45 and 0.40 as many others are predicting. It's instructive that the Kiwi has held relatively stable last week when Wall Street was down 6% and investor risk aversion increased. The lack of price actions tells me that no-one is interested in playing the Kiwi from the short-side, or any side for that matter. My expectation is that the NZD/USD will increase to 0.52/0.53 on a 0.50% cut in the OCR by the RBNZ on Thursday, March 12. While the local moneymarkets have pegged-back their pricing from a 100 point cut to somewhere between 50 and 75 points, it may still be something of a surprise to overseas participants that the RBNZ only cut by 50 points. Depending on the accompanying RBNZ commentary, there may also be some growing perception that this might be the last downward move in NZ interest rates. ---------------- * 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