By Roger J Kerr
Market chit-chat about how global “currency wars” may impact on the NZ dollar value are exaggerated and are really just a side-show in my opinion.
The main event for the Kiwi dollar is the AUD/USD rate and whether the race up in the AUD from 0.9200 to over 0.9700 is too fast, too quick and thus the Aussie vulnerable to a major correction down on profit-taking.
Even though the FX market intervention by the Japanese authorities on the JPY/USD market appears ineffective to date, I am still of the view that the Bank of Japan will win the war, even if they may have lost the first battle with the Yen back down to 83.00. Although there is no sign of the AUD suffering from Yen weakness yet, I still expect to see this influence on the AUD.
Whether the political and trade threats over the Yuan’s value from the US towards China has any impact on other currency value I am also doubtful about.
The Chinese are not going to be rushed on their exchange rate/monetary policy reforms by the US. They know that the US cannot afford to upset the Chinese too much as the US is reliant on Chinese investment into US Government Treasury Bonds to fund the US fiscal deficit. Wholesale selling of Treasury Bonds by the Chinese is certainly not in the US’s interests as they need the lower mortgage interest rates to restore some confidence in their residential real estate market. I do not expect any further changes in the Yuan currency policy anytime soon.
What I do expect is the USD to recover from the current value of $1.3800 to the Euro.
Sovereign debt issues are brewing up to explode again in Europe with the Irish looking particularly vulnerable with blow-outs in bank rescue packages. At some point not too far away, global investors into Europe are going to become very uneasy as to the safety of their money, just like they did back in May.
Since that time the global economic/investment landscape has been dominated by weaker US data and what the Fed Reserve may or may not do. I see the focus coming back on Europe as the US economic figures slowly improve.
It is very difficult to see the Euro currency value continuing to appreciate in this anticipated environment. I am surprised to see the EUR/USD rate at $1.3800, however one cannot be confident it is going to stay here too long if the news coming out of Europe deteriorates over coming weeks. The Euro just has to be vulnerable to selling taking it back to $1.3000.
The Kiwi has been to 0.7400 before and could not sustain the higher levels. The domestic economic news and events suggests a weaker Kiwi, not further gains. However, it is the USD and AUD movements offshore that are driving daily NZD/USD movements.
Should the RBA tomorrow not be as outright bullish on the Australian economy as the markets suggest the timing and rationale for a correction down in the AUD looks likely to eventuate.
* 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