By Roger J Kerr
The risk to exporters of the NZD appreciating further above 0.7800 and onto 0.8000 has reduced over the last week with the EUR/USD reversing in the global FX markets from $1.3800 to $1.3570 currently.
The AUD remains strong at 1.0140 against the USD with hard commodity prices underpinned by rising manufacturing output everywhere except China.
Whether the NZD/USD rate can depreciate quickly over coming weeks to the low 0.7000’s to fulfil our forecasts, depends heavily on developments with China and commodity prices.
I still believe that the Chinese monetary authorities will continue to tighten policy with higher interest rates and bank credit ratios.
They are worried about inflation and will be prepared to sacrifice some GDP growth to keep the inflation tiger in the cage.
The Chinese are restricted on monetary policy management with one arm tied behind their back with their rigid exchange rate regime.
Their control of inflation would be much more effective if their currency was allowed to appreciate.
However that is not about to change.
Tighter monetary policy in China should result in a pull-back down in hard commodity prices and a lower AUD value. We are now observing the fourth occasion of the AUD trading above parity of $1.000 to the USD, however being unable to sustain and hold the gains. Where the AUD goes from here is directly associated with USD movements against the Yen and Euro.
The stronger economic data coming through in the US continues to roll into the markets and this has to be more positive for the USD currency value vis-a-vis the Euro and Yen.
Europe is not about to increase their interest rates anytime soon and we have yet to see any response from the FX markets to the cut in Japan’s sovereign credit rating.
Any slower growth in China would not be good news for the Japanese economy and this may force policy changes there to really weaken their currency to compensate.
A stronger USD back to $1.3000 and 85.00 against the Yen would certainly pull the AUD and NZD off a few cents.
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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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