By Roger J Kerr
The spike upwards in the Kiwi dollar to new record post 1985-float highs of 0.8300 last Thursday night following the RBNZ’s monetary policy report has again sparked calls from all and sundry that someone - that is, the Government, the RBNZ - should do something about the 'out of control' currency value and currency market.
The reality of life is that the NZ dollar is constantly out of the control of any one entity, its value every day reflects natural daily market supply and demand and expectations of future supply/demand.
The aggressive buyers of the Kiwi dollar over recent weeks are clearly convinced that the NZ economy will out-perform others due to the high export commodity prices we are enjoying.
The buyers must also believe that NZ interest rates will be rising in six months time (which I agree with) and that the US dollar itself will be sold heavily in global FX markets (which I disagree with).
Heavy overseas investor demand for NZ Government bonds also continues as a positive for the Kiwi.
In addition, the buyers of the Kiwi dollar are also clearly in the international investor camp of 'risk-on'.
Looking ahead, I continue to hold a view that a stronger US dollar and lower commodity prices will bring the NZD/USD rate down over the next few months.
Recent economic/financial market developments that support this view include:-
- Global FX markets sold the USD against the EUR to $1.50 last month. Those weaker USD levels could not be sustainable in the face of continuing sovereign debt problems in Europe. The Europeans think that the Euro can withstand a Greek debt default – “yeah right!” Watch for the EUR/USD exchange rate to go below $1.40 in the short-term.
- The US monetary quantitative easing policy (QE2) is not being replaced after 30 June. US core inflation forecasts will need to be revised upwards as house rentals are no longer falling at the rate they once were. US short-term interest rates are still likely to increases sooner and faster than European interest rates.
- Monetary policy continues to be tightened in China and India as their inflation tracks uncomfortably upwards. Global financial and investment markets focus heavily in Chinese economic data nowadays and slower growth seems likely.
- Oil prices are headed back down as the Saudis walk away from OPEC production agreements. Other commodity prices are unlikely to move the opposite to oil.
- The golden run upwards in global sharemarkets since the GFC in 2008/2009 underpinned by monetary stimulus policies (i.e. super low interest rates) has now run out of steam as the central banks withdraw the stimulus and start tightening.
- The rising commodity prices/high AUD currency value environment has come to an end. The AUD/USD exchange rate holds a very high historical correlation to copper prices. Copper prices have been declining in a jagged fashion since March (see chart below). A drop below $8,600 in copper prices over coming weeks breaks the uptrend line since late 2008. The AUD does not remain out of synch from copper prices for very long, and currently it has some catching up to do! The AUD appears particularly vulnerable to a sizeable sell-off when $1.0500 against the USD is decisively broken.
My assessment is that the NZD is currently over-bought against the AUD at 0.7800 and when the AUD depreciates on lower commodity prices over coming weeks, the NZ dollar selling will be faster and further than AUD selling.
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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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9 Comments
I wouldn't bet the farm on this.
Reported elsewhere on this site today a credible view that total US debt is US$100 trillion. Considering the sad state of most of the EU, the Chinese economy's precarious course.
More QE on the way?
It's entirely possible that food commodities could defy gravity indefinitely. Along with the K$.
It's a very high-tech crystal ball that produces any guarantees in this mess. Like the one on Steve Keene's desk.
:)
Maybe indefinitely is a step too far, but certainly for some time yet. If China, India and South East Asia continue to grow, even at a slower rate than now, their appetite for our produce may keep our agriculture and horticulture afloat.
It's no great help to our long-term economic decline relative to the rest of the world because it would just mean more low wage jobs but it would be better than the alternative.
http://www.mistywindow.com/my-countrys-going-down-the-gurgler/
I am happier with 'for some time yet' as a possibility. More likely though is that our production costs rise faster than that of alternative producers and we lose out through becoming less competitive.
The link is interesting. Many people are independently coming to the conclusion that we are being failed by our political leaders - but have yet to collectively put up an alternative to our model of venal, self serving and competency challenged political parties.
My view is Roger should cut back on what he's smoking....
NZ isnt in a good place but the world is far worse....so unless or until China or the EU melts down I think the NZD is staying close to where it is.....
Once we see the EU or china implode, well all bets are off....
regards
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