By Roger J Kerr
Whether the NZD can push higher above 0.8200 this week will largely depend on developments in the EUR/USD forex market.
The European interest rate and FX markets initially priced in continuous rate hikes by the ECB this year after the increase from 1.00% to 1.25% a month ago; however over recent weeks that conviction has waned.
The ECB have another interest rate review this Thursday, and it appears to me that they might tone their wording down somewhat on the inflation front.
Less conviction about further European interest rate increases should see the EUR/USD fail at its attempt to reach $1.5000 (currently $1.4830).
Certainly, both fiscal and monetary policy developments in the US have dragged the USD down over recent weeks, despite US economic data generally printing reasonably well. Again the key US Non-Farm Payroll employment figures this Friday night will have a large bearing on the short-term sentiment towards the US economy and currency value.
The other key driver of the NZD/USD exchange rate is the Australian dollar. The Aussie posted spectacular gains last week following the higher than expected CPI inflation increases of 1.6% for the March quarter. The markets have automatically assumed that the RBA will be increasing interest rates again in June, thus positive for the AUD. The RBA have an OCR review tomorrow, Tuesday.
I am not so sure that the RBA will lift interest rates again so quickly.
There were a lot of one-off price increases in the March figures related to food supply shortages from the Queensland floods, as well as seasonal educational and health sector increases. The non-mining state economies of NSW and Victoria are not recording strong growth and therefore there is little demand-side upward pressures on consumer prices in Australia.
The extraordinarily high AUD value has already done a lot of the monetary tightening for the RBA; there are not strong arguments to lift interest rates again at this time. Their core inflation trends appear comfortable enough. My guess is that the FX markets will be disappointed at the lack of commitment to raise rates from the RBA.
Looking back at the factors that have driven the Kiwi dollar to above 0.8000 over recent weeks, there is a hint that the positive forces may be running out of steam:-
- Reinsurance capital inflows from the earthquake have slowed up somewhat.
- While the overseas demand for NZ Government bonds remains extremely strong, the large-scale pre-funding (borrowing early) should reduce issuance amounts later on.
- Increases in our export commodity prices are not as large now and a correction down could be on the cards (ANZ Commodity Price Index is released later today for April).
- The negative US monetary and fiscal news on the USD may now be behind the markets.
Picking the top of the NZD climb is a dangerous occupation, however the Kiwi has never held above 0.8000 for long on previous occasions.
Offshore investors into Kiwi dollars will be considerably more cautious at buying NZD’s 0.8100 than what they were at 0.7200.