Kiwi dollar down against all currencies

By Roger J Kerr

A number of people have commented to me over the last week and a half that they thought the NZ dollar would have fallen a lot further in the FX markets on the earthquake disaster being reported around the globe.

The NZD/USD exchange rate was sitting just above 0.7600 when the quake struck on Tuesday 22 February and it is now trading at 0.7360, a 3% depreciation but far from being a free-fall.

The lower NZD value against the USD appears to be on the surface a less than dramatic reaction.

However on an overall Trade Weighted Index basis against the major currencies the currency value is down a much larger 4.3% over the past two weeks, from 67.80 TWI on 21 February to 64.88 today.

The NZD has fallen on its own account against the USD due to the earthquake/lower NZ interest rates, while over the same time period the USD itself has weakened against the EUR, GBP, JPY and AUD. Most of the cross-rates have been "double-whammied" lower.

The wider interest rate gap to Australia has hammered the NZD/AUD cross-rate to 19-year lows of 0.7270.

The lower NZD value across the board is very good news for the export sector enjoying a great summer growing season and record high agriculture commodity prices.

Having reacted as it has to the natural disaster shock and resulting interest rate market changes, the NZD/USD rate from here is now more likely to be driven by international USD currency market movements.

I would not expect any surprises from Thursday’s RBNZ Monetary Policy Statement that would push the NZD sharply up or down.

The FX market has priced in a 0.25% cut already, and even the expected 0.50% cut in the OCR to 2.50% may not cause another bout of NZD selling. For the FX markets much will depend on what the RBNZ say in their statement, however I cannot see any of the text and tone being too NZD positive.

While the USD has not made the gains I was expecting against the EUR on the back of stronger US economic data, one would have to have conviction that at $1.4000 the EUR/USD rate has ran into major resistance and should reverse.

I am still not convinced that the ECB will raise their interest rates anytime soon (despite Monsieur Tichet’s "vigilant" wording change against inflation threats) and when the FX markets lose confidence about the probability of a European rate increase, the Euro should lose ground against the USD back to $1.3000.

The Europeans need to agree on the debt bail-out packages and ongoing rules of engagement for their indebted southern nation cousins before lifting interest rates.

The FX markets seem to be saying that they want to see three of four strong months of employment growth in the US before concluding that the Fed Reserve will not need a QE3 and thus buy the USD. All the lead indicators for employment in the US point to stronger numbers being delivered this year, therefore it finally does appear that the US economic recovery is starting to sustain itself.

The stronger US economic data should be positive for the USD currency value, however so far we have not seen much evidence of that.

A rebound by the US dollar in global currency markets over coming weeks looks more likely than continued weakness; therefore the NZD/USD rate should continue its downtrend to 0.7200/0.7000.

The USD Index is trading right on a critical support line at 76.30 and the USD may attract more buyers if it can bounce upwards from this latest pull-back.

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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