Roger J Kerr expects 3% growth, rising interest rates, and relatively low public debt to push the NZD back to US$0.80. You agree?

 By Roger J Kerr

A tentative return of confidence in global financial and investment markets over recent days suggests that the NZ dollar, as a “risk asset” that ebbs and flows with such international investor sentiment, will hold onto is latest gains from below 0.7500 to 0.7700 against the USD.

Yet again, the NZD/USD rate is looking like it has bounced off the support area of 0.7500 that it has rebounded upwards from on several previous occasions over the last two years.

While many exporters from New Zealand in USD’s may be hoping and praying for a lower NZD value this year, the evidence is starting to mount again that rates into the low 0.7000’s will not be achievable.

The most likely scenario for the Kiwi dollar’s future direction over coming months is that it remains in the broad 0.7500 to 0.8000 trading range.

Factors that will be determining the NZD/USD movements over coming weeks will continue to be international events/developments rather than any particular news on the NZ economy itself.

The short-term outlook appears to be biased to marginal NZD gains rather than any concerted selling that would take it below 0.7500. Influencing variables are likely to include:

- International metal and mining commodity prices seem now more likely to stabilise after their recent decreases. The easing of monetary policy by the Peoples Bank of China last week where they cut their interest rates should help underwrite industrial activity levels and thus GDP growth in China. The risk of a “hard landing” by the Chinese economy is now much reduced and it is easy to see the speculative sellers of commodity markets over the last month, buying back their positions and thus providing price support. The AUD/USD exchange rate closely follows the global CRB commodities index and the dominant influence over the NZD/USD direction from day-to-day is the Australian dollar. Latest monthly Chinese industrial production and retail sales data for May were neither up nor down on the previous month. As previously stated in this column, China has the monetary policy fire-power to prevent any economic slowdown. That facts underpins the NZD exchange rate value through the commodity price/AUD nexus.

- Stronger than expected GDP growth and employment figures in Australia last week will certainly remove over half of the 100 basis points the interest rate markets in Australia were building in to the forward curve for future OCR interest rate cuts. The AUD has posted strong gains on these improved numbers as the future interest rate track changes abruptly. The local New Zealand money markets have followed suit and already removed one 0.25% OCR cut that was priced into the forward interest rate curve. The second 0.25% cut is also likely to be priced out of the forward market as well. It is non-sensical that NZ short-term interest rates blindly follow the Australian market; however the Kiwi dollar will no longer be under any downward pressure due to pricing-in of interest rate cuts here. They never were that likely in the first place.

- The Kiwi dollar also tracks the EUR/USD exchange rate closely and it is becoming very evident that if international financial and currency markets really thought there was a high probability of the European banks/economy completely imploding, they would have already sold the Euro currency against the USD from $1.3000 to $1.0000. The fact is that the Euro has only marginally weakened to $1.2500 through all this recent turmoil of Greek political upheaval and problems with Spanish banks. The latest announcement from the European Union that they will lend Spain EUR100 billion to shore up their banks’ balance sheets is evidence that the European leaders are finally getting the message that they cannot allow contagion to engulf the entire European banking market. Looking ahead, the Euro is more likely to drift lower to $1.2000; however a generally stable NZD/USD rate would only see the NZD rise on the cross-rate against the Euro.

- Governor of the Reserve Bank of New Zealand, Alan Bollard is unlikely to make any waves for the foreign exchange markets with his Monetary Policy Statement on Thursday 14 June. He will express concerns about Europe and the global economy and will acknowledge that the NZD has depreciated over the last month and he no longer needs to threaten interest rate cuts to bring it down. The RBNZ will also need to start acknowledging that the housing market is picking up quite strongly on the back of record historically low mortgage lending interest rates. GDP growth figures on 21 June should also not surprise with a +0.50% expansion in the March quarter forecast.

- Wholemilk powder prices reverse sharply upwards in the latest Global Dairy Trade on-line auction after several months of continuous falls. The volumes sold were low; however it does indicate the market became over-sold on the additional milk supply situation earlier this year. Stabilising of dairy prices should contribute to the NZD/USD exchange rate also settling around the 0.7700 region.

Whatever way it is examined right now the NZ dollar does not carry any major downside risks.

The NZ economy will out-perform most others with +3% GDP growth over the next year, interest rates will eventually be needed to be increased well ahead of the US and Europe and the Government’s fiscal and debt position is far healthier than most others.

It does not add up to a recipe for NZD weakness, indeed in the medium to longer term the conditions appears ripe for NZD appreciation back above 0.8000 as foreign investors recognise New Zealand’s relative attractions.

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* Roger J Kerr runs Asia Pacific Risk Management. 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