Every picture tells a currency story - why the kiwi is overcooked

By Roger J Kerr

Given the weaker than expected employment numbers, lower house prices and another large pull-back in milkpowder auction prices, the purist would have anticipated a lower NZD value as interest rates in NZ will be lower for longer.

Unfortunately local economic data has not had any influence over the NZD/USD rate for several months now, the day-to-day pricing of the Kiwi currency solidly in the hands of international traders/speculators that are looking at the Dow Jones Index, the EUR/USD rate and the AUD/USD rate as the primary determinants.

The rise of the US share market over recent weeks to 10,600 on the Dow Jones Index seems to me to be very much at odds with the weaker US economic data that has driven the USD currency down.

The rise of the Dow Jones Index largely being due to US corporate earnings being above prior forecasts and expectations. The better profits must have come from the January to April period when manufacturers were still benefiting from the inventory re-building cycle.

The weaker US economic numbers that have hurt the US dollar have come from the May to July period after the end of the inventory re-building cycle.

I am not sure whether the FX markets have got this right or whether the US equity markets are right, or both are wrong.

My pick is that US economic data will improve over coming months as we move on from the post inventory re-build lull of recent months. The Dow Jones Index is telling us this will happen, even if the FX markets are not.

Whatever way you look at it, the following four charts would tell you the Kiwi is over-cooked at 0.7300.

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 * 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