Opinion: Antipodean currencies pulverised!

Last week the Kiwi dollar appeared to be stabilising around the 0.6000 level with occasional bouts of selling taking the currency towards 0.5800. However the growing signs of stability emerging were quickly shattered last Friday night when the Kiwi plunged six cents from 0.6000 to lows of 0.5400 as global equity and commodity markets plummeted to new lows. The sudden sell-off had little to do with economic conditions in New Zealand or the widely anticipated 1% cut in official interest rates the previous day. The dominant force behind the strong selling pressure was again the collapsing Australian dollar.

The AUD/USD has not managed any kind of rebound on profit-taking, as was anticipated, following its plunge from 0.9800 in June to 0.6800. Instead the deteriorating global economic situation and the associated outright collapses of metal and mining commodity prices have sent the AUD down the gurgler without trace. The AUD was again sold heavily as Asian sharemarkets crashed and Japanese investors and traders have been forced to cut AUD investments. The Japanese Yen has strengthened to 94.00 against the USD and the AUD depreciated another six cents to 0.6000. The NZ dollar is caught up in the backlash of these global events, tossed around in the turbulent sea of global currency markets. What we are witnessing with the continued selling of the NZD and AUD is that investors and traders everywhere do not want exposure to minor currencies whose economies are dependent on commodity prices. Funds continue to be returned to the known safety and stability of the Japanese Yen and USD. There have not been too many forecasts of the NZD trading significantly below 0.6000 against the USD, however most forecasters would have underestimated the massive demand from global investors to return to the USD when turmoil struck international investment markets. The NZD and AUD should stabilise when volatility decreases in world sharemarkets. Picking just how and when that will occur in the current environment is difficult and dangerous in itself. Some currency forecasters were expecting the NZD/USD to reach the mid 0.5000's by year-end. Typical of the wild market conditions and how currencies behave, the Kiwi reached that level in one night! The NZD weakness is almost entirely due to the wholesale rout of the AUD, the NZD/AUD cross-rate is holding relatively stable in the 0.8800 to 0.9000 range. Reserve Bank of Australia intervention buying the AUD over the last two trading days should make currency speculators wary of continuing to sell the AUD. When any currency plunges 37% in a few weeks, as the AUD has done from 0.9800 to 0.6200 against the USD, there are always victims caught on the wrong side of the market. News emerged last week of Citic, the investment arm of the Chinese Government, losing billions of dollars on a large "bought AUD/sold USD" hedge on a planned investment into the Australian resources sector. The ability of the Chinese economy to maintain manufacturing production levels is absolutely vital for the future fortunes of the AUD currency value and the Australian economy, both of which are so dependent upon Asian demand for their minerals, iron ore and coal. The AUD and NZD will only stabilise when the global economic and investment markets settle. One would expect that the markets will close-up very early for the Christmas holidays this year. By mid-November substantially lower trading volumes on equity and currency markets may lead to the desired stability. Hedge funds and proprietary trading desks of investment banks have considerably reduced their activities and risk taking. Investors and markets are exhausted after the largest economic / financial crisis in history. We are perhaps not far away from a prolonged period where value of investment assets and currencies will not move too much at all as very few will be seeking cross-border and international investments. One result of the world financial crisis is that international capital flows will be severely curtailed over coming years. If there was no global economic / financial crisis at this time the New Zealand economy would be looking much more positive as it is now substantially stimulated by both looser fiscal and monetary policies. Provided agricultural export commodity prices do not fall a great deal further, the NZD economy could come out of recession ahead of most other countries in 2009. The lower interest rates and exchange rates working together to lift returns and investment confidence in the export sector. The general election in two weeks time clouds the economic and currency outlook to a minor degree. Lower business confidence has to be anticipated if a Labour/Green coalition government is returned to power. A lower NZD bias would continue on this outcome. A change to a more business-friendly National-led government may hold the Kiwi in a more stable fashion in the 0.5500 to 0.6000 range through 2009.   --------------- *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