Opinion: AUD feels the heat and backlash from plunging commodity prices

The NZD/USD exchange rate is on-track to plumb new lows below 0.6500 and 0.6400 as commodity and high yield currencies fall right out of favour with disillusioned overseas investors and currency traders. Hedge funds and others are slamming the Australian dollar down hard as a weaker global economic outlook hammers the commodity prices the Aussie economy is dependent upon. Luck has run out for the "lucky country". The plummeting AUD against the USD has spiralled the NZD/USD cross-rate higher to 0.8600. It is hard to see this cross being sustainable at these levels and it offers AUD importers an unexpected opportunity to hedge AUD payments forward. As expected, the second Kiwi upwards correction that ran up to 0.6900 last week was short-lived. The USD internationally is making the gains we expected to see also. The US economy may have some problems, but there are larger economic problems in Europe, Japan, UK and Australia. The US cut its interest rates some time ago, these other economies still have some work to do in this respect. The FX markets in dumping the Euro, GBP and AUD, are signalling a clear message to the monetary authorities in these countries "“ "cut your interest rates sooner rather than later". There is also no question that Asian and Middle-Eastern investors still favour the USD as a safe-haven currency over and above the Euro. Our forecasts of the NZD going to 0.6000 and below are gaining a much higher probability weighting. Exporter's USD hedging programmes must continue to be at least 50% in the form of currency options in this environment of a strengthening USD and falling NZ interest rates. Adding to the Kiwi's woes is the new territory of large "twin deficits" with the internal budget deficits blowing out earlier and to higher levels than what most imagined. The credit-raters should be seriously re-assessing NZ's sovereign rating outlook. The US also has twin external and internal deficits and S&P's recently re-affirmed their high credit rating. However, we are not the US, their economy is massively diversified, the NZ economy is narrow and vulnerable to global economic weakness. The economic fundamentals that ultimately drive the NZ dollar value have weakened significantly this year, further depreciation is anticipated and warranted. ------------------ *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