Opinion: NZD forgotten as the global economic crisis deepens

By Roger J Kerr After many months of a plummeting value and extreme volatility, the NZ dollar is finally showing signs of stability. The speculative and investor interest in the Kiwi dollar has died right away in recent weeks. Interbank market liquidity remains quite poor, with the buy/sell price spread widening out to 20 and 30 points when volume has to be cleared through the market. Interest in the NZD dollar from overseas players has reduced to nearly zero, with many banks, investors and companies around the world all suffering from the worst economic crisis since the 1930's and thus more concerned with their own issues. New Zealand is right off the radar screen, therefore it comes back to local import/export trade and investor flows to determine the NZD's value from day to day. It appears that the Kiwi is now entering a completely new zone of stability and limited movements in the 0.5000's against the USD. This stability is expected to last for several months. The NZD/USD foreign exchange market, like the AUD/USD FX market, had fully priced-in further OCR interest rate reductions to 5.0% by the RBNZ last week. There was no surprise that the currency value hardly moved away from 0.5300 when the RBNZ delivered precisely to market expectations with the largest OCR cut since that monetary policy regime commenced in 1999. The collapse of the NZD from 0.8000 to 0.5000 over the last eight months has already fully priced-in the plunge in interest rates were are now witnessing. There has to be a reasonable chance that when the NZD starts to recover back upwards against the USD in two or four or six month's time, it will again by the first indicator of the New Zealand economy starting to move out of recession. There is a lot of water to go under the bridge before we see this inevitable NZD appreciation, but when it starts to develop it will again be well ahead in timing of more positive economic data and interest rates rising again. The FX markets are always pricing in the future well ahead of other markets and economic commentators. In the meantime, the NZD/USD rate should remain between 0.5100 and 0.5700 as the volumes of buying and selling the currency at this extraordinary time is insufficient to cause a larger movement, up or down. The other NZD currency cross-rates should also remain close to current levels over coming months. Half the NZD depreciation from 0.8000 to 0.5000 has been due to USD strength against all currencies, the other half has been foreign investors exiting the NZD on its own as the reason for holding Kiwi dollars (high interest rates) was no longer valid. The expectation of a very stable period with lower volatility has to be based on an expectation that the USD itself will now stabilise for many months between $1.20 and $1.30 against the Euro. There are already signs that the USD is settling into this trading range. Again the trading, speculative and investment flows are much reduced in the global forex markets with no-one taking new of aggressive positions in the markets. The NZD/USD rate has always maintained a close correlation to the USD currency index. Currently the level of the USD index at 87 suggests the Kiwi should be above 0.6000. This is one strong reason why the NZD will not depreciate further to 0.4000. One has to be very, very bullish on the USD and hence the US economy to substantiate that view. With record US job losses of over 530,000 in the month of November alone, unemployment rates up to 6.7% and interest rates about the be halved from 1.00% to 0.50%, it is very difficult to see the USD strengthening a great deal further. On the other hand, the Europeans have been very slow to recognise the seriousness of the economic crisis and the need for them to reduce interest rates. They should have been lowering interest rates 12 months ago when the US saw the early signs of the credit crunch developing into something far more severe for investment markets, financial markets and the global economy. The Europeans were pre-occupied with high inflation and mis-read the economic slowdown signals over the first half of 2008. There are now reducing their interest rates to the 2.00% area, but it is far too late. The Euro has already weakened against the USD in anticipation of the US:Euro interest rate gap closing up.    --------------- *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