By Roger J Kerr
The sharp pullback in the NZD/AUD cross-rate from a high of 0.9500 two weeks ago to 0.9170 today cannot be of great surprise.
It was speculative betting that pushed the NZD up against the AUD on the back of our major commodity price (dairy) zooming skywards a month ago, whereas Australian mining and metal commodity prices remained anchored to their lows.
Short-term speculative buying always leads to positions being unwound rather quickly when some piece of economic news no longer renders the original trade a safe bet.
Stronger than expected Australian jobs numbers for the month of October (+56,000 against prior forecasts of +15,000) last Thursday propelled the AUD higher against the USD, whereas the NZD was heading the other way.
An immediate retracement in the NZD/AUD cross-rate to below 0.9200 was the result.
The re-rating of the NZD above the AUD on the higher commodity price rationale was to a degree understandable; however it placed the NZD/USD cross-rate at 0.9500 miles above the more dependable interest rate differential lead-indicator. The gap between the NZ and Aussie two-year swap interest rates has remained stable at +0.75% (NZ above Australia) over recent months a continues to point to the NZD/AUD cross-rate being fairly valued at 0.8900/0.9000.
The fact that the NZD/AUD cross-rate is now back into a more realistic trading range and more fairly valued below 0.9200 means that one of the potential negatives for the NZD/USD rate has been removed.
When the NZD/AUD cross-rate was nearer to 0.9500 there was greater risk of NZD selling against the AUD, sending the NZD/USD rate lower. That adjustment has now taken place, so the downside risk for the Kiwi dollar from its current level of 0.6520 has reduced.
Expect the NZD/USD rate to range trade in and around 0.6500/0.6600 over coming weeks until December when the volatility will increase with the RBNZ statement on 10 December and the Federal Reserve on 17 December.
To subscribe to our daily Currency Rate Sheet email, enter your email address here.
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