Opinion: US$ gains add to the kiwi's many problems

Up until two or three weeks ago the negatives for the New Zealand dollar (NZ$) were confined to lower interest rates and a local economy in recession. The NZ$ had depreciated significantly on the cross-rates against the strong AU$ and EUR, but was holding its own against the US$ and GBP.

 Up until two or three weeks ago the negatives for the New Zealand dollar (NZ$) were confined to lower interest rates and a local economy in recession. The NZ$ had depreciated significantly on the cross-rates against the strong AU$ and EUR, but was holding its own against the US$ and GBP.

Today we have many more negatives stacking up against the kiwi and this is why it has nose-dived to below 0.7000. The reversal in global commodity prices has sent the AU$ plunging against the US$ as hedge funds and currency speculators who bought into the AU$/high commodity price duel trade reverse all engines and dump out of the Aussie currency. For the first time in three years the US$ itself is making gains as FX markets quickly realise that the next move in interest rates in Europe and Australia is down, not upwards.

The US$ has broken above a seven-year downtrend line. Adding to the NZ$ selling pressure has been the reiteration last week by Governor Bollard that interest rates are poised to be cut significantly and employment/wages data was as the RBNZ expected and does not alter their monetary policy path. “How low can the kiwi go”? - is a question I get asked about 10 times per day. Well – in my view it has much further to go against the US$, perhaps to the low 0.6000’s much quicker than what most would imagine. However on several of the other cross-rates, the weaker AU$ and EUR (stronger US$) should result in stability at these lower cross-rate levels. I see the US$ continuing to strengthen against the EUR, GBP and AU$ as the interest rate differentials to those currencies move in the US$’s favour.

The US$ has completed a major turning point, reflecting that the US economy will be growing again much earlier than Europe and elsewhere. Local exporters in US$’s finally have things going their way with a stronger US$ globally and lower interest rates locally. The further falls in the NZ$/US$ exchange rate over the next several months will be a vital ingredient in stimulating and export-led recovery in the NZ economy by mid 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.