By Roger J Kerr
A week ago ahead of the 0.25% reduction to the OCR by the RBNZ, I was of the view that the currency markets had already largely priced-in the upcoming interest rate decreases.
It was instructive that the Kiwi dollar moved higher last Thursday following the slightly less dovish statement from Governor Wheeler than the markets were expecting prior.
However, the lack of follow-through buying of the NZD is also telling, indicating that only a small number of the swag of “short-sold” NZD position holders have unwound and cashed-up.
While a further two 0.25% interest rate cuts are also priced-in to the NZD/USD forex markets, what is far less certain is how much of the expected further falls in dairy commodity prices is already factored into the Kiwi dollar price today. The markets will be expecting lower dairy prices yet again and further bad news for dairy farmers at the next GDT auction on Tuesday night, 4 August.
Over coming weeks, if the Wholemilk Powder dairy prices do display tentative signs of forming a base of support at the much lower levels, more short NZD speculative position holders will see that as the signal to take more of their currency profits off the table i.e. buy back Kiwi dollars. How these variables play out should determine whether the NZD/USD exchange rate finds its ultimate bottom at 0.6500, 0.6300 or 0.6100.
It is also instructive for future exchange rate direction on how the NZ dollar has outperformed the AUD over this last week.
The NZD/AUD cross-rate moving up from 0.8800 to 0.9050 as the AUD is hit hard again to a new low on lower global commodity/energy prices. The preference of some offshore currency players to sell the AUD, however not the Kiwi, just tells me that everyone is short the Kiwi dollar to the max and have no more limit/appetite to sell any more.
A sliver of more positive economic news for New Zealand could be the catalyst to cause these short-term position holders to buy back. Additionally, northern hemisphere summer holiday season will prompt some level of book squaring over coming days.
Aside from dairy prices, NZ interest rates/economic performance and the US dollar itself, the other two key drivers of NZ dollar direction are global commodity prices (AUD) and global equity markets.
Over the last 12 months the Kiwi’s fall from its heady heights of 0.8800 has been consistent with the significant pull back in commodity prices, but not equities. Therefore, part of what forms the view on future NZD/USD movements from 0.6500 is whether commodity buyers and investors gain sufficient confidence about demand and growth in the global economy going forward.
The US economy is now strong, Europe is on the mend, China has question marks (however I do not see any major blow up) and the Emerging Markets are really struggling. Again, early signs of stabilisation/recovery in commodity prices will support the NZ dollar.
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Roger J Kerr is a partner at PwC. 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