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Opinion: Only lower milk powder prices and an OCR pause can drive the Kiwi lower

Opinion: Only lower milk powder prices and an OCR pause can drive the Kiwi lower

By Roger J Kerr

Looking ahead at all the variables that drive the NZD/USD exchange rate value, it appears to me that only two of those factors have the potential to drive the currency lower.

Outside these two forces, the Kiwi will continue to track the EUR/USD, the Dow Jones Index, the AUD/USD rate and CRB commodity prices up and down from day-to-day.

The two potential negative Kiwi currency drivers are:

1. If our own export commodity prices started to fall away and slump independent of global commodity prices, it would be seen by the markets as negative for the Kiwi dollar.

Already Fonterra’s auction prices for wholemilk powder have dropped as Chinese buyers pull back from the market now that they have increased their inventory levels to the required amount. Additional supply has come into the international milk powder market from other countries (attracted by the high prices).

Over coming months the wholemilk powder auction moves to fortnightly auctions, further price weakness will reduce confidence in our largest industry and put downward pressure on the Kiwi dollar.

2. The RBNZ have clearly signalled that they are increasing the OCR back to 5.00% from 2.50% in a stepped/mechanical process.

They are removing the emergency monetary stimulus they put in place when world trade virtually stopped in early 2009.

Should the RBNZ for some strange and unexplainable reason decide not to increase the OCR at their six-weekly OCR and MPS review dates, the Kiwi would take a tumble.

Such a decision would be totally contrary to what the Australians and Canadians are doing with their monetary policy adjustments and would signal that the NZ economy has a problem that requires emergency monetary settings to remain in place.

I do not expect the RBNZ to surprise the market in this way, however what is surprising is the number of economic commentators and business lobby groups who are calling for the RBNZ to pause or stop the OCR increases.

Even a pause would be a major change in monetary policy management and would send the Kiwi lower.

Exporters becoming worried about the persistence of the NZD/USD rate above 0.7000 may wish for a RBNZ surprise of the nature described above, but they should not base their hedging strategy around such low probability outcomes.

We would have to see a major deterioration in the local and global economic outlook from here to force the RBNZ to move away from their well signposted path.

The Kiwi dollar has returned to following the EUR/USD rate of late, therefore I am reasonably confident that the NZD will again not stay above 0.7000 for too long.

The Euro does not seem comfortable above $1.2900 and the higher probability has to be the re-emergence of EUR selling now that the EUR short-covering buying is out of the way.

The AUD has not sustained rates above 0.8800 for long either. Latest news out of China and India is that steel has been over-supplied and prices are falling. No sign of price weakness in the CRB Commodity Index yet from these developments, however it may not be far away.

An excellent lead-indicator of Chinese industrial production and GDP growth is electricity output. Electricity usage has been decreasing sharply over recent months in China, so watch out for more weaker economic numbers over coming months from this source.


 * 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

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I am not an economist and I have a limited knowledge of what drives markets.

One scenario that I think may be worth considering is that the OCR will stay low not because of any economic slowdown or sustained period of low growth but because the world may be  moving towards a lower interest rate environment for the forseeable future.

This is brought about by the whole world now having a different attitude to risk and borrowings and excess as opposite to the excess of the previous 20 years.

The markets are also now driven by speculators as opposed to mainly fundamentals like they used to be. Massive amounts of money drives all the markets which will make them a hugely volatile place for a long time.

I think we need to get used to wild and sudden fluctuations in all the fx and commodity markets and a low interest rate environment.