Opinion: Out-of-favour Aussie dollar weighs the Kiwi down

The upward correction in the NZD/USD exchange rate from 0.6830 to 0.7200 is well and truly over with the Kiwi being unable to sustain the higher level and drifting back to 0.7000 over this past week.

This price action confirms that the rebound was nothing more than profit-taking by currency speculators who had sold the NZD at higher levels and needed to buy back those same NZDs to square there positions.

The fairly rapid return to 0.7000 also underlines that there is no real permanent capital inflows into the NZD occurring at this time. Foreign investors are no longer attracted to a currency that is depreciating, where monetary policy has been changed from tight to neutral, where the economy is in recession and where higher interest rate returns are now achievable in alternative currencies like the South African Rand, Brazilian Real and Turkish Lira. There is also no question that the big commodity currency, the Australian Dollar, is now firmly out of favour with international portfolio investors. The risks surrounding the AUD, which have always been there, are now coming home to roost.

Questions are being asked as to the likely industrial demand for the mining and metal hard commodities that Australia produces in the face of significantly weaker economies in Europe and Japan. The next questions is whether the strong Chinese and Asian demand for the raw commodities will now also reduce with a lower growth trajectory for the global economy. Mining and metal commodity prices have slumped from their record highs of six months ago along with the lower oil price. The Australian dollar is not only under pressure from falling commodity prices, lower interest rates and difficulties for investment houses like Babcock & Brown has also eroded international investor confidence. It is hard to see the Australian dollar moving back up against a resurging USD on global currency markets.

The Reserve Bank of Australia should be cutting official interest rates this week and Governor Stevens will present a rather dovish outlook with his commentary. Market conditions and expectations have turned abruptly in Australia, and the NZD will be pulled down by further deterioration in the AUD. The reasons to invest into and hold NZ dollars are just not their any more. The global foreign exchange market has changed with the US dollar itself turning up from its eight-year downtrend. The Kiwi is on track to be trading in the 0.6000 to 0.6500 band by year-end. The only real risk to this forecast is that another major US banking/investment institution falls over and global investors into USD's take fright again. As time rolls on this risk probability is becoming less and less in my view. ------------------

*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.