By Roger J Kerr
The NZ dollar has yet again hastily retreated from 0.7400 against the USD to move lower to the bottom end of its 0.7200 to 0.7500 trading range.
It has not been US dollar strength that has driven the NZD/USD rate down to 0.7240. The USD has marginally weakened to $1.1220 against the Euro following yet another postponement of Federal Reserve interest rate hikes last week.
The Kiwi selling has come from portfolio investors and hedge funds pulling funds out of New Zealand as they cash-up their unrealised investment gains into realised returns.
Australian institutional investors who have been significant buyers and holders of NZ listed stocks this year have clearly been unwinding their positions, banking their substantial sharemarket and FX gains on the NZD/AUD cross-rate from 0.9000 to 0.9700.
The Australian sell-out has propelled the NZD/AUD exchange rate sharply downwards from 0.9700 to below 0.9500 last week.
Offshore hedge fund and real money investors have also been cashing up their lucrative NZ investment gains, the NZD/USD rate plummeting from 0.7365 to lows of 0.7220 on 22 and 23 September.
Often there is never one single catalyst that causes these overseas players to change their view on the NZ dollar. It is typically a combination of the extent of their unrealised gains, the time of year, global risk sentiment and investments with more upside elsewhere.
The Kiwi dollar has posted an impressive run up from 0.6400 to 0.7400 over the last 12 months as the offshore players took the view that the RBNZ would be slow and predictable with interest rate cuts, therefore the Kiwi dollar was a reasonably safe bet.
Their assessment of our central bank has been bang on and therefore the NZ dollar was preferred over the Australian dollar where the RBA were less predictable and likely to burn the investors at some stage.
Those capital inflows and now turning to outflows as the Kiwi’s dream run comes to an end.
As has been highlighted in this column previously the NZD exit door is not wide enough in terms of FX market liquidity when offshore investors decide to pull out all at once.
It is easy to invest smaller amounts into the NZ dollar progressively over time. However, the foreign investors always under-estimate the size and liquidity limitations of our market when the time comes to exit.
The result is the “up the stairs, down the elevator shaft” syndrome the Kiwi dollar has a notorious reputation for.
It looks like this well-established pattern is being repeated right now and thus continued strong selling of the Kiwi dollar to below 0.7000 cannot be ruled out over coming weeks.
The NZD/USD rate has already plunged nearly three cents from highs of 0.7480 in a very short space of time, another three cents lower to below 0.7000 is quite achievable.
Last week’s monetary policy statements from both the US Federal Reserve and RBNZ were overly hesitant, predictable and cautious as most had expected.
However, why the Kiwi dollar has been sold since is the realisation that New Zealand’s interest rates will be cut again in November and US interest rates will be increased in December, rendering the Kiwi dollar a less attractive investment destination than previously. The interest rate differential between the US and NZ short-term rates reduces further and is at odds with a rising Kiwi dollar value.
The last GDT dairy auction produced wholemilk powder (“WMP”) price increases considerably below what the futures market was anticipating beforehand.
Perhaps there is a realisation that the dramatic climb from US$2,000/MT to US$3,000/MT in the WMP price over recent weeks has been too rapid. The frenzied Chinese buying in the lower import tariff window (similar to last year at this time) may have run its course and the gains need to be consolidated in. The WMP gains to US$3,000/MT are consistent with a 0.7000 NZD/USD exchange rate, not a 0.7500 or 0.6500 exchange rate.
Looking ahead over the three months to the end of the year, the global financial and investment markets will be increasingly focused on the US Presidential election race with an important marker this week with the first live television debate between Donald Trump and Hilary Clinton.
The economic policies of both candidates are not exactly US dollar friendly with anti-free trade agendas and Government spending promises reversing budget deficit improvements over recent years.
Financial markets do not like uncertainty. However, in reality the US President has very little control and influence over economic policy/performance.
Fed boss Janet Yellen has mush more economic power. The US dollar failed to attract fuel from the last Federal Reserve meeting. The markets will now be assessing the next employment data release on Friday 7 October as a pointer for USD direction. For the direction of the Kiwi dollar over coming weeks, it still looks to be downward due to general US dollar strength to below $1.1000 against the Euro.
For those following the technical/chart signals on the NZ dollar, the NZD/USD rate breaks below its 50-day moving average at 0.7220 and the NZD/AUD rate breaks below its 50-day moving average at 0.9500. Both rates appear set to move lower.
Roger J Kerr contracts to PwC in the treasury advisory area. 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