Opinion: Export prices and equity market volatility key for the NZD direction

By Roger J Kerr There has to be some confidence that the extreme measures Governments and Central Banks around the world have taken over recent months to combat the adverse impact of the financial and economic crisis that has engulfed the global economy, will start to work soon and restore investors and consumer confidence. That restoration of some confidence from both parties is vital for the future direction of the New Zealand Dollar. If global consumer confidence can recover somewhat through 2009 (benefiting from the stimulus of loose fiscal and monetary policies everywhere) there is a good chance the demand and prices for our food exports will stabilise. It is essential for our own economic recovery that the international USD prices for our agricultural exports (beef, lamb, dairy and horticulture) stabilise at current levels. The substantially lower NZD/USD exchange rate in the low 0.5000's has pushed our export commodity price index in NZD terms back to record high levels. This is very good news and we will see an export-led recovery in the economy if this can be sustained. The fall in the exchange rate over the last six months has played a crucial part in giving us the opportunity for an export-led economic recovery with the domestic sectors of retail and housing still likely to be in the doldrums through 2009. A return to positive GDP growth for the NZ economy in the second half of 2009 will mean that interest rates will go no lower than 5.00% (not to as low as 4.00% as most of the banks are forecasting). Only the forecast or prospect of positive growth in late 2009 will be sufficient to keep the RBNZ at a "loose" monetary policy setting of 5% interest rates, not a "super loose" setting of 4.00%. The signal formulating over coming months of the bottom in interest rates will also help the NZD stabilise in the 0.5000's and not push lower into the 0.4000's as some are expecting. Some luck with the weather through the summer months would also help our agriculture production and assist the return to positive GDP growth. The restoration of investor confidence will also stabilise markets, reducing the extreme market volatility that has been a major factor in foreign investors ditching-out of the NZ dollar over recent months. As US sharemarket (the VIX Index) volatility reduces the heavy selling of the NZD should also reduce. The expectation is that the markets will this week move early into Xmas holiday mode with reduced trading volumes with investors and traders alike not prepared to make decisions and take new positions. Another factor that should support the NZD/USD rate from falling below 0.5000 is the direction of the USD against other major currencies. The USD has strengthened 22% against the Euro from $1.60 in July to $1.25 today. That stronger USD trend is not expected to continue with European interest rates now falling (the FX markets have already priced this in) and the US internal budget deficit growing as new President Obama moves swiftly to spend to save the economy in early 2009. These factors suggest that the USD will not strengthen much further and thus reduce the chances of a weaker NZD from a stronger USD globally.    --------------- *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