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Opinion: Volatility to reduce, Kiwi to stabilise

Opinion: Volatility to reduce, Kiwi to stabilise

The mortgage belts in Auckland City and provincial New Zealand have voted for change and a new Government has the hard job of leading the economy out of recessions. The implications for the exchange rate have to be mildly positive, with business confidence expected to lift and optimism for the future enhanced. Given how far the NZ dollar has fallen in recent months, there may even be some brave global forex traders that take a view that if a former foreign exchange dealer can become a Prime Minister within six years, anything is possible for the currency ! However, realistically, greater forces are at work internationally that will determine the NZ dollar's fate over coming months. The New Zealand economy went into recession well ahead of other major economies, due to the overly-tight monetary policy settings from 2005 to 2007. We could well come out of recession back onto a growth path in 2009 ahead of other countries, provided our agricultural export prices do not reduce any further. Stabilisation of our international export prices at current levels is absolutely key for that economic recovery. In NZD terms our export price index remains near to record highs due the currency depreciation over recent months. This is a major positive, with the automatic shock-absorber of a free-floating currency doing its job very well to insulate the economy. Lower export commodity prices have been matched with a corresponding fall in the NZD. Exporter and farmer incomes remain stable despite the product price decreases globally. Another major contribution to the weaker NZD trend is the change in monetary policy from tight to neutral. Interest rates have plummeted from 8.50% to 6.00% in the space of a few short months since June. The much lower interest rate environment makes New Zealand much less attractive for international investors. Capital inflows for portfolio investment into NZ will be limited with interest rates below 6.00%. Foreign investors who wanted to get out of the NZD because the interest yields are no longer so attractive, have now largely done so. Further heavy NZD selling from this source is not expected. If market interest rates (1-year swap rates) have only another 0.50% to fall a cyclical low of 5.50%, the end of the NZD downtrend may be not that far away. Much depends on whether the USD continues to strengthen globally. If it is viewed that the USD will strengthen a little further to $1.2000 (currently $1.2800) against the Euro, the NZD could push lower to just above 0.5000. Also standing in front of the market as a major negative for the Kiwi dollar is $1 billion per month over the next 12 months of maturing uridashi and euro-kiwi bonds, which only a small proportion will be rolled over. This NZD selling should keep the NZD/USD rate in the 0.5000's over coming months. Continuing as a major influence on the NZD direction is the Australian Dollar. Reserve Bank of Australia direct intervention in the foreign exchange markets to stabilise disorderly markets halted the plunge in the AUD a week ago. The AUD rebound against the USD from 0.6000 to 0.7000 was not totally unexpected given the fall from 0.9800 not so many months ago. If global hard commodity prices (minerals and metals) can now stabilise, the AUD should also stabilise at the much lower levels. The commodity markets have already priced-in a global economy moving into recession. Whether they fall further depends on economic news from here being in line with expectations or being worse. If the worst is already fully-priced, the Australian dollar may find some feet, and so will the Kiwi dollar. The Australian dollar did not weaken any further last week when the RBA delivered another surprise with a higher than expected 0.75% cut in their official interest rates to 5.25%. The lack of subsequent AUD selling is telling, the international investors who wanted to get out of the Aussie must have already departed as well. This augers well for a stabilisation in both the AUD and NZD over coming months. International financial and capital markets have been through a very tough year and all participants are totally exhausted. Volatility should reduce substantially over coming weeks as the markets wind-down early for Christmas. With no-one prepared to do anything, the local NZD foreign exchange market will thankfully move into much narrower daily trading ranges.    --------------- *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    

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