Opinion: Kiwi$ likely to bottom out around 55-60 USc
16th Sep 08, 2:37pm
The RBNZ's decision to reduce the OCR by 0.50% to 7.50% took the markets by surprise and added momentum to the NZD downtrend. The RBNZ's reasoning for "front-loading" the timing of adjusting monetary policy from "tight" to "neutral" is justified. They cited a weaker NZ economy, a weaker global economy and the higher bank lending margins from the ongoing credit crisis as factors behind their decision. The FX and interest rate markets are already pricing in further 0.75% to 1.00% reductions from the current OCR at 7.50%. Once the RBNZ reduce the OCR to 6.75% by Christmas they should pause and review what the economic and inflation outlook for 2009 is, before cutting any further. The 90-day wholesale interest rate between 6.00% and 6.50% would be seen by the RBNZ as a "neutral" monetary policy setting. The only reason why they would take the OCR below 6.00% would be if the economy is still projected to be in recession in 2009. That does not seem at all likely at this stage with an export-led recovery next year and a return to positive GDP growth. If that does not happen and the economy stays in recession for much longer into 2009, interest rates will have to go lower and the NZD/USD exchange rate could be well into the 0.5000's. The preferred view is that the economy does recover and the NZD/USD exchange rate finds a bottom to this down-cycle in the 0.5500 to 0.6000 region. ------------------ *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.