Where the exchange rate will go in 2011

20th Dec 10, 3:19pm by Roger J Kerr

Here are eight NZD foreign exchange market questions to ponder over the beach, beer and BBQ holiday period.

1. What does a better performing US economy and continuing deterioration in the sovereign debt crisis in Europe mean for the NZD/USD direction?

Seems to be one-way traffic to me as the NZD/USD will follow the EUR/USD rate down to $1.2500 over coming weeks (currently $1.3140). The close correlation/linkage drives the Kiwi near to 0.7000.

2. Who could be the big buyers of Kiwi dollars over coming months?

Well, it is not going to be carry-traders, hedge fund, Uridashi bond or Asian investors chasing yield return. They are much more inclined to invest in the larger neighbouring AUD’s. I could see Australian corporates seeking to buy NZ businesses and manufacturers at a cheap NZD/AUD cross-rate to supply into Australia at a low cost base. If and when the Kiwi does go below 0.7000, our large exporters such as Fonterra will be heavy buyers of Kiwi as they hedge projected USD receipts forward.

3. Who could be the big Kiwi dollar sellers over coming months?

There still appears to be some legacy long-NZD speculative position holders who have yet to close-down by selling NZD’s. If the People’s Bank of China increase their interest rates again, commodity prices will fall and this in turn causes new speculative selling of the AUD and NZD against the USD.

4. Will historical GDP growth data prompt further NZD selling?

What happened in the NZ economy in July, August and September is on the surface irrelevant to FX markets that supposedly are always looking forward. However do not dismiss a sharp sell-off the below 0.7300 after Thursday’s figures if the September quarter’s number is less than 0.0% i.e. negative.

5. What is the most likely scenario for NZD/USD movements in 2011?

The more probable scenario is a stronger USD globally against the Euro and Yen pushing the NZD/USD rate to 0.7000 and maybe a bit below over coming months. The lower NZD/USD rate will allow USD exporters to hedge and thus secure robust profitability for 2011 with the high export commodity prices. From March/April onwards the risk increases that the NZD will be forced back up again to 0.7500 as NZ is the only country increasing its official interest rates in 2011. By March/April the forward looking NZ economic indicators should be sufficiently strong to cause a RBNZ U-turn from their current benign economic outlook.

6. What are the interest rate differentials to US interest rates telling us?

It pays to look at the gap in the two-year swap rates, not the 90-day rates as the NZ 90-day wholesale rates are held artificially low at 3.20% by the RBNZ’s OCR settings. The two-year swap rate differential lead-indicator points to 0.6500.

7. Will the NZD depreciate if Standard & Poor’s downgrade NZ’s sovereign credit rating?

The Kiwi would certainly be sold by all and sundry if S&P’s took that action. However, I rate this as a very low probability of actually happening. S&P’s seem concerned at NZ Inc’s vulnerability to global financial market shocks i.e. borrowing markets seize up again for NZ banks who are on-lending the funds to highly indebted NZ households. It is an exaggerated concern in my view and S&P’s are far too pessimistic on their GDP growth forecast for NZ of 1.4% for 2011. They appear to be a very long way behind the times and not understanding what drives growth in the NZ economy (that is, export prices which are at 30-year highs).

8. Is it disturbing that the letters that make up our “Kiwi“ currency are the same as “Wiki” leaks?

Does that suggest that there is some international conspiracy and plot to destabilise the currency? Ian Wishart could write a book about that, but we all have more important things to think about over Xmas.

Have a great break!

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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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6 Comments

by Wolly | 20th Dec 10, 7:27pm 1292826465

Look for the Kiwi to climb the aussie staircase to 79/80 over the year.

by Basel Brush III | 20th Dec 10, 8:16pm 1292829383

Roger,

What about the GBP/NZD?

It seems the GBP may be contaminated by Euro concerns.

by Mossad | 20th Dec 10, 8:24pm 1292829884

Wolly, I don't think it will.

Agents are reporting NZD/AUD to stay around 72 to 76 cents for next year. NZ government wants it to stay there for NZ exports to Aussie. It is helping our trade deficit.

The RBA will hike again in Feb/March 2011. Employment numbers will keep the A$ up.

Bollard will hold as long as he can but banks will put rates up due to European problems. Also, watch Japan. It could be the wild card.

by michael | 21st Dec 10, 2:01am 1292850081

FXCM analists are expecting an AUD sell off in 2011, The resons for an AUD depreciation can be both fundamental and technical. According to the PPP the AUD is overvalued by 31%, the Kiwi 9.5%, should they level out the exchange rate will go back to 1.20. A rate rise in China will hit AUD much harder than the Kiwi because it will hit the industrial commodties rather than food... rate rises or not they will still have to eat although the heaviest component of Chinese inflation is the rising cost of food, Australia's exporters, retailers and tourism are hurting from the exchange rate another rise will hit employment..

But we are ahead of the first two months of the year and demand for industrial commodities slows down only to pick up by early March and that should cool the Aussie economy so it is unlikely that the RBA will need to rise rates in March. And if China tightens they might even be forced to lower their rates later in the year.

Anyway it will be an interesting year for Forex traders and the focus will move to China's Monetary Policy Meetings since they can not force banks tightening beyond 20% of money flows.

by michael | 21st Dec 10, 3:22am 1292854932

BTW, China has allowed the Yuan to apreciate against the USD today. That gives the chinese more buying power wich counters the rising cost of food , the chinese officials belive that that alone will be enough to curb inflation, they do not see the need for rate hikes in the near future.

by Steve Netwriter | 21st Dec 10, 11:10am 1292883001

All currencies down. Continue to hold gold and silver.

All of the above is in fact noise compared to the major movement of all currencies.

Take your pick, look at it like this:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Compar…

Or relative to gold, which gives a more realistic picture, like this:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Compar…