By Roger J Kerr
Trading patterns for the New Zealand dollar over recent weeks continue to display a stability and resilience above 0.6500 to the USD that defies the majority of currency forecasters who have been predicting further depreciation to 0.6000.
As repeated in this column consistently over the last two months the Kiwi dollar sellers are exhausted with all the bad economic and commodity price news fully priced in already.
It is no great surprise that the NZD/USD has moved higher to near 0.6700 as the speculative short-position holders slowly and surely unwind their NZ dollar bet and buy the currency back.
Without question a bounce back up in wholemilk powder prices last week and a marginally weaker US dollar on the world stage has aided that Kiwi dollar improvement.
What is highly instructive for the future direction of the NZD is the fact that the currency traded higher from 0.6500 to 0.6700 last week despite a major sharemarket sell-off in the US, crude oil prices below US$50/barrel, weaker Chinese economic data and Emerging Market currencies under considerable pressure.
Even though NZ GDP growth is currently being pegged back from above 3% to around 2%, our currency still stands out as a safer place to be in a very uncertain financial/investment market environment.
Further New Zealand dollar gains could eventuate over coming weeks if the US dollar weakens on the Federal Reserve postponing the first 0.25% interest rate increase in 10 years from the expected September timing.
The greater probability still appears to be that the Federal Reserve will make their move in September and wait for many months before doing the second 0.25% interest rate increase sometime in the first half of 2016.
The FX forecasters who are picking further NZD weakness to 0.6000 are basing their view on the US dollar automatically strengthening against all currencies when the Fed lift US interest rates. History over the last 40 years tells us that the US dollar currency value has moved both up and down in about equal proportions on all the Fed monetary tightening events. It is far from a forgone conclusion that the USD will automatically appreciate when US short term interest rates are increased.
The FX markets always price all future events in to the exchange rate today, thus rising US interest rates over the next 12 months have already been priced in, through the USD appreciation against all the major currencies over the last 12 to 18 months.
The longer the NZD/USD exchange rate continues to trade across the page in the 0.6500 to 0.6700 area, the probability increases that the bottom of the Kiwi dollar slide may indeed prove to be the 0.6500 level.
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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