Opinion: Why the Kiwi could hit 38 USc this year
3rd Feb 09, 5:00pm
By Philip O'Connor In a 2006 article Dani Foo and I presented evidence that the New Zealand dollar appeared to have an 8.5 year cycle against the US dollar. The graph here shows the two complete cycles since the NZ dollar was floated in 1986 (grey and blue lines). In the graph, the peaks of June 1988 and November 1996 are set to week 0. The subsequent peaks occur 439 and 446 weeks later, respectively and occur at almost the same price. The low points of both cycles are less coincident, but occur around the mid-point of the cycle at 237 and 213 weeks, respectively. However, appreciation in the NZ dollar was not particularly noticeable until around 280 weeks into the cycles. Why a cycle might exist is beyond the scope of this short note. However, a couple of famous cycles have been extensively studied: The Kondratieff 80-year long-wave cycle and a 4-year cycle in US stock prices. In our 2006 article we speculated over the odds that such a cycle may continue. As we are now at the 203rd week in the current cycle, it seems a useful time to update. We added the current cycle from March 2005 (red line) to the other two cycles. The major difference is that during the down portion of the current cycle, the NZ dollar went to a new historic (post-float) high. While some may argue that this negates the cycle, the high occurred at the time when many assets such as commodities reached historic highs in US dollar terms. Moreso, the exchange rate has fallen hard over the last few months. When a cycle actually "exists", a characteristic of cycles that "hold-up" is a hard fall into the bottoming portion of the cycle. This action offers evidence that the 8.5 year cycle is still in existence, but also adds a warning that market action can change from what is expected. March 2009 to October 2009 represent the bottom of this cycle, if it conforms to the past two cycles. Let us assume that the current cycle continues in similar fashion to the previous ones. At what price would the NZ dollar signal bottom? While this is pure guesswork, it is noteworthy that the second cycle starting on November 1996 was more volatile than the first cycle, and the most recent cycle has been even more volatile. For example, it made a new post-float high, perhaps exhibiting bubble behaviour. This may indicate that in reversing the bubble that the NZ dollar could fall below the post-float low of 0.38. Alternatively, one could argue that the greater strength during the current cycle implies a higher low. However, going below 0.5 as it recently has, the NZ dollar has already achieved the low of the first cycle (1988 to 1996). The good news from this cycle analysis is that it indicates a bottom in the New Zealand dollar sometime during 2009. * Philip O'Connor is a Senior Lecturer in finance at the University of Auckland's Department of Accounting and Finance.