By Roger J Kerr
A surprising sell-off last week in the US dollar on global FX markets allowed the NZ dollar to make gains to a high of 0.6740.
The Kiwi dollar appreciation was in the face of further falls in dairy commodity prices and record low historical inflation in NZ that has had some pundits calling for further interest rate cuts.
The fact that the NZD was sought after by buyers as a safe alternative to the USD when the local determinants were reasonably negative just reaffirmed once again that offshore players in the Kiwi are not interested in speculating that the NZ dollar will depreciate a lot further.
In a very uncertain investment world why would you sell a currency of an economy that has a 3% growth rate and has just signed a free-trade agreement with nine countries that comprise 40% of global GDP? The NZD/USD rushed up to above 0.6700 too rapidly at the end of last week and it was no surprise to see it recoil back to 0.6630 when the USD showed signs of recovery after their jobs data on Friday.
Our long-standing view that the NZD/USD exchange rate will anchor near 0.6500 for a prolonged period continues to play out as expected.
The reasons behind the weakness of the USD to $1.1200 against the Euro last week were difficult to fathom. The US Federal Reserve is now on a monetary tightening cycle and the ECB in Europe has indicated further monetary loosening with negative interest rates. Those contrasting policies should have the Euro weakening, not strengthening!
The USD selling appeared related to the US interest rate markets moving from pricing two Fed rate hikes this year to no hikes on the back of some mixed US economic news of late and share market volatility.
The US moneymarkets have over-reacted in my view, the Federal Reserve is not likely to suddenly change tact from their measured and considered path to normalising monetary policy conditions. The Euro gains to $1.1200 never looked sustainable and a more likely direction is further Euro weakness back to $1.0500/$1.0600 over coming weeks from the current $1.1100 level. The anticipated recovery in the USD should see the NZD/USD rate back into the 0.6400/0.6500 region.
Outside of the regular GDT dairy commodity auctions, the next important local piece in the Kiwi dollar jig-saw will be the CPI inflation in mid-April.
The RBNZ will not be changing their monetary policy stance one way or the other until they see clear evidence that the lower NZD value over the last 12 months has increased imported items and thus lifted tradable inflation. There was only a small amount of evidence of price increases for imported consumer goods in the December 2015 quarter’s CPI numbers, however it appears that more widespread price increase are happening now.
Another factor that could cause the Kiwi dollar to depreciate on its own account over coming weeks is the fact that at 0.9350 the NZD/AUD cross-rate is again over-stretched on the top-side. The interest rate differential between Australia and New Zealand currently points to a more realistic 0.8900 NZD/AUD cross-rate value. Speculative selling of the Kiwi against the Aussie dollar should bring the cross-rate back down.
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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