Link to strong Aussie dollar overpowers any local concerns for the Kiwi dollar

Link to strong Aussie dollar overpowers any local concerns for the Kiwi dollar

By Roger J. Kerr

What drives the NZD/USD exchange rate value day-to-day was aptly demonstrated in the aftermath of the Canterbury earthquake.

It could have been expected that the global newswires flashing a major earthquake in New Zealand would have caused an immediate reaction to sell the NZ dollar, as potential disruption to the economy would be a negative. As it transpired there was very little impact on the forex market and the NZD continues to move up and down in response to AUD, commodity price and US sharemarket movements.

The Kiwi has moved up to the top-end of its long-established trading range at 0.7300 against the USD. A stronger AUD to 0.9250 against the USD following improved US and Chinese economic data was the main impetus behind the NZD gains last week.

Both the NZD and AUD have failed to sustain their gains at these higher levels in the past.

The forming of a cobbled together coalition Labour Government in Australia has also had limited impact on the AUD exchange rate. The mining rental tax remains very unpopular in Australia and with overseas investors; however it will still be implemented under the Julia Gillard Government. The increase in global hard commodity prices has for the meantime over-ridden any negatives for the AUD from the mining super tax.

The Reserve Bank of Australia remains upbeat on the outlook for the Australian economy, albeit qualified with some concerns about the fragility of the global economic recovery. The moneymarkets in Australia have done a remarkable about-turn in the last few weeks and are now pricing-in further official interest rate increases instead of decreases. The Australian dollar continues to benefit from speculative buying when global investors have the “risk on” button pressed in times of upward movements in world equity markets.

However, as has been seen in the past when the AUD records rapid gains well above 0.9000 to the USD, the market sentiment and direction can and does change abruptly when the sharemarkets reverse downwards. Whilst the Australian economy is certainly stronger and performing to a higher level than all others, it remains particularly susceptible to any weakness in global commodity and equity prices. The direction of the AUD against the USD will remain as the dominant influence on the NZD/USD rate over coming months.

Any pull-back in commodity prices will be accompanied by a stronger USD internationally against the Euro, thus a further reason for the AUD and NZD rates to fall against the USD. The local currency market will be focused on the Reserve Bank of New Zealand’s Monetary Policy Statement on Thursday 16th September. The Canterbury earthquake event has ended any possibility of an OCR increase up from the current 3.00% rate, for the meantime.

However, Alan Bollard still has to remove the emergency monetary stimulus settings put in place 18 months ago and get official interest rates up to where the true market price for money is trading at i.e. 4.50%/5.00%. The effectiveness of monetary policy management, signalling and implementation is severely compromised if the official rates are 2.00% below the real market levels. Whilst the RBNZ may be temporarily pausing with the removal of the stimulus for good reason, they still have to do it.

The outlook for GDP growth and thus inflation risks in the second half of 2011 certainly do not justify any continuation in the loose/highly stimulatory monetary settings. Mr Bollard has a real challenge to make the media commentators understand that he is not tightening monetary policy with the OCR increases; actual market interest rates (what banks are paying for retail deposits) have been at 4.50%/5.00% for many months.

He merely needs to lift official interest rates to catch up to where market interest rates are already sitting. Whilst the local financial markets widely expect an OCR pause this Thursday, offshore market participants may be a little surprised and conclude that the NZ economy is not travelling too well.

Therefore, some NZD weakness should be expected, dependent on how changeable the RBNZ’s outlook on the NZ economy is. A more dovish than expected forward view on the NZ economy from the RBNZ may suggest interest rates lower for longer and thus Kiwi dollar selling.

Weaker Yen and Euro against the USD should halt further Kiwi gains

The economic and financial news out of Europe has not been as positive over recent weeks with the impressive German growth numbers this year tailing-off somewhat of late. There are renewed concerns with the quality of assets and capital levels of many European banks, therefore further EUR weakness from $1.27000 against the USD should be expected. A lower Euro exchange rate will pull both the NZD and AUD rates back from the top of their trading ranges at 0.7300 and 0.9300 respectively.

Similarly, the USD currency value internationally should benefit from any aggressive FX market intervention by the Japanese monetary authorities to stop the Yen strengthening below 84.00 to the USD. Threats of intervention to sell the Yen have not been affective to date; however history tells us that the Yen can suddenly jump to whole new level when the banks and investment houses are instructed by their Government to also sell Yen.

The Japanese Government is currently in disarray with a leadership challenge, however when they get their act together they desperately need to a weaker Yen to help their big exporters be more competitive internationally. The Japanese economy, like New Zealand’s, is highly dependent upon export-led growth.

* 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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Roger Roger Roger

As I professional I would have thought you had understood that the fundamental relationship between the OCR and rates has changed.

1.  GFC has made banks and everyone else less keen to take hot money so ma and pa funds are more attractive and therefore attract a premium

2.  The Core Funding Ratio of the RBNZ and a similar one proposed by BASLE will mean that the link will forever remain changed

3.  Foreigners will understand this - they are NOT stupid.

There has already been de-facto tightening, all you are asking for is an excuse for the banks to improve their margins.

Be explicit what your are asking for - not tightening for the sake of improving the economy, but tightening so banks can go back to earning cosy margins

SIGH!!!!

shivers......... I wish I'd said that.

Like I've always said, if Roger Kerr says the kiwi dollar is doomed (ie every week), I buy more.

I've made good gains in the last 6 months while this so-called currency expert has been proven wrong time & time again.

 

Ready for US75c Roger?? Cos here we come!!

 

http://www.stuff.co.nz/business/market-data/4130182/Dollar-nudges-US74-c...