Opinion: Why the real driver for the Kiwi$ is the Aussie$, not the talk of currency wars

Opinion: Why the real driver for the Kiwi$ is the Aussie$, not the talk of currency wars

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.

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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

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15 Comments

Roger , with all  due respect my good fellow , the 'Talk of a currency war ' is not just talk .

Its been a low level conflict for some time now , and the weapons are not  guns , jet fighters and tanks, rather its all about market manipulation , money flows and investment . Aussies and Kiwi's should not be so smug about the closeness to China . The Chinese government do everything in their own self interest .  

I grew up in a country very closely aligned to the old guard  Communist China, and you cant trust the Chinese authorities as far as you can spit . They built the TAZARA railway , not for some benevolent reason , they did it because landlocked Zambia has the largest known copper reserves on earth . The befriended Mozambique and sold them guns they did not need , in exchange for fishing rights in the Mozambique channel and then emptied it of almost all its sea life .

The Chinese are lovely people , but their government cannot be trusted .

China is now the elephant in the kitchen and no one knows what do do about it . The resorting to competitive devaluations is the only way out of this mess for smaller economies .

Unchecked ,  New Zealand will have to follow suit or we might find our Dairy products become so expensive on international markets  , we will end up with it being dumped into the sea .

The chinese are not lovely....they'd sell your kidneys to make a buck....

In terms of competitive de-valuations.......I cant see much of a choice, I'd love to see someone suggest what else we can do.

Great for the banks & Govn though the value of our debt held by the banks brought in from abroad gets slashed, of course we borrorwed off the bank in NZD.....so us the consumer would be left on the hook....then the cost of new debt rockets and we get screwed again....I cant see how we at the bottom actually win.

regards

Well Steven...we could be the mouse that roared.........and declare Trade War on ..please select from the list below......

uh.....nope

urrrrm....nope

errrght......now way

holy moley.....nah never

Looks like someone will have to decide for us.........not long to wait..!

floatsam on a stormy sea comes to mind..........

We appear to have no where to go.....we appear to be unable to do a thing........truely helpless.....

As in our currency is seen as risky its easy and quick to dump....so what ever Bollard etc does getting it even a little bit wrong could have a very severe impact.....

I dont think there is long to wait either...it looks so "accelerated" now...........at some point the pre-emptive strike followed by MAD....yes mas......truely insane.

regards

Roger - really?

'The NZ dollar through the financial crisis'

http://www.rbnz.govt.nz/research/bulletin/2007_2011/2010sep73_3cassinowallis.pdf

Nah.

Cheers, Les.

www.mea.org.nz

 

Thanks....

regards

Roger , with all due respect my good fellow , you have absolutely nailed a crucial point . All this hand wringing over currency rates ........... We've been here before ........... And yet the key cross rate is with Oz , our major trading partner , and neighbour . And that rate favours exporters to Australia .

The government has tinkered with the fiscal levers , but done little to truely set NZ onto a sustainable growth path . And that - not the level of our currency - is where we need to place our attention .

That's because Gummy there is no sustainable growth path.....none.....zilch.......the very best we can hope for at present is not too big a drop..........In terms of tinkering the Govn has nudged things a bit...it can nudge a bit more however stability is the most important thing....you cant correct 10+ years of PI stupidity in an few months....and not risk a major impact / recession...

Roger has gone off on a bit of a tangent....so far he clearly seems to be under-estimating the impact of global events on us....which is ironic given the risk...

regards

 

 

Methinks " interest.co.nz " is off on a tangent . Rogie is spot-on to note the key currency to NZ , that of OZ , not the $US . The MEA keep harping on the currency too , thinking that NZ needs levers to control the volatility of the $NZ . They too , have got it wrong .

The world needs many of the products NZ has to offer . But the price must be competitive . And the production process be seen to be clean .

If NZ chooses to fritter the proceeds of our exports  on the welfare state or big boyz toys , more the fool NZ . Other countries pour munny into R&D , to remain competitive , and to innovate . By doing so , their currency becomes a side-show , rather than the main event .

Crap, as usual, from Roger.

Thanks for your cutting insight into the issues at hand....  

Some basic lessons in economics would help many of the so called commenters on this website...  so much gibberish yapped about....

I know Roger and I have faith in his judgements and calls...  I agree with his analysis because from an economic point of view he is basically right.

You can all yip on about how the Chinese are taking over the world forgetting that just 20 years ago we were all about to be screwed by the Japanese...  well that worked out a bit differently than everyone was so confidently predicting....

of course when it comes to currencies I bet none of you remember the Plaza Accord from 1985 either....  you all wish it were guns because that it easier to understand than economics.  

Hear hear, Roger.  It's amazing how Hickey has managed to spin a "raging global conflict" out of a single quote from a Brazilian minister with a flair for the dramatic. (Also, it pays to say something headline-grabbing when you're having an election.)

If there is any "currency war", it is a cold war that has been ongoing for decades.  No nation has ever really stopped believing that they could get ahead of the pack by debasing their own currency.

........ is that you , Duke ? ........... I like the disguise . Well done . Give Bernie gyppo , to keep him honest , from the plaudits of his gloomy band of doomsters .

Roger you where right this time