By Roger J Kerr
Why the NZ dollar has ended the year pushing 0.8500 rather than falling below 0.8000 (which was my preferred scenario) can be put down to two major factors:
• The absence of a further European financial/investment market blow up over recent months.
Since the GFC hit in March 2009 we have been on a regular six-month cycle of European sovereign/bank debt pressure points sending global markets into downspins, which in turn has caused bouts of weakness in a growth/commodity currency like the Kiwi dollar.
The last European blow-up was back in June and the Kiwi dropped to 0.7600. We were due for another bout in December; however it was never likely to happen. The European economic and financial risk intensity has been relieved over recent months by the ECB’s “whatever it takes” approach with monetary policy accommodation.
The hedge fund speculation against European sovereign debt markets and banking stocks has ended.
• The actions of the US Federal Reserve under their dual inflation/growth mandate to add extra monetary stimulus with QE3.5 as they fret that their unemployment rate is not falling fast enough.
Linking the continuation of additional monetary measures to future unemployment levels, rather than a time scale is a bit of a master stroke; that is, if the Fed have underestimated the strength of the US economy and unemployment reduces at a quicker rate than what they are currently forecasting, they reduce the risk of inflation running away from monetary conditions being too loose for the economic environment.
US economic data continues to improve; therefore the chances are that the extreme monetary stimulus will be removed somewhat earlier in 2013/2014 than what most people think.
The latest US monetary stimulus actions have weakened the US against all currencies (except the Yen) on the global stage.
Looking forward into to next year, on the proviso that the US economy continues its recovery and European numbers are downright dreadful, the greater probability is that the US dollar itself will appreciate as the FX markets price-in (well in advance) the ending of US monetary stimulus.
Coupled with inevitable further interest rate cuts by the ECB in Europe, it is really difficult to see the EUR/USD exchange rate remaining at $1.3175. A return to the low $1.20’s continues to be more likely than staying above $1.30 for the Euro, therefore the global currency market influence on the NZD/USD rate from 0.8460 has to favour down over further gains.
Domestically, the focus this week will be on Thursday’ GDP growth numbers for the September quarter. Weaker than expected retail sales and employment figures initially suggested a quarterly change of 0.00% to +0.20%. However, stronger primary manufacturing, construction and export data since then have lifted forecasts to the +0.30% area.
A GDP result on Thursday well below +0.3% would exert downward pressure on the Kiwi.
To me it was entirely coincidental that the US Fed Reserve were adding monetary stimulus at the same time the Aussies cut interest rates in early December. Therefore, the expected AUD weakness due to lower interest rates did not materialise.
Add on the RBNZ effectively ruling out OCR cuts at their MPS last week and we have a temporary situation of the Kiwi pluses outweighing the minuses.
The pattern over recent years has been for the Kiwi dollar to appreciate strongly in early January as global equity markets roar into the New Year with gusto.
My bet is that this year we will see the opposite, given the gains local and most international share markets have already made in 2012.
The big surprise is that the US fiscal cliff uncertainties have not caused increased financial/investment market volatility, perhaps it is still to come. Given the recent rapid gains for the Kiwi dollar from 0.8200 to 0.8460, the risk/reward equation favours a pull-back ahead of further gains above 0.8500. Exporters should be patient or hedging with purchased NZD call options only in this current environment. The gap the NZ dollar Trade Weighted Index (TWI) has put over the general USD currency value (USD Index) is now at the most extreme in 10 years.
If our export commodity prices were hitting record highs the superior NZ dollar performance would be justified, however the reality is that our commodity prices have returned to long-term average levels. The NZ economy has performed relatively well, but not that well. If the USD Index lifts to 85 or 90 next year, the NZ dollar TWI will not be staying at the 75 highs.
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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
15 Comments
Why the NZ dollar has ended the year pushing 0.8500 rather than falling below 0.8000 (which was my preferred scenario) - is beyond belief, right? Let's hope those predisposed to trading wishes rather than reality were forced to cut losses early and save their own and client's diminished wealth. Here is a bit of insight into what might unfold.
Interesting charts.
Problem is that the US has no interest in a strong dollar policy. Last time that happened Fed chairman Paul Volker raised interest rates to 18% and gold fell to $250US. Gold is the anti dollar. What followed was a 30yr bull market for bonds....all that is over now.
I just find it hard to imagine a set of circumstances like that today. Debt is far higher. Debt deflation a real problem.
How do you see a strong dollar evolving. Or is it simply trading sentiment that will swamp it?
Cheers
How do you see a strong dollar evolving
Which dollar? - I am a confirmed weak USD advocate - the US administration believes it has a God given right, after winning the cold war, to pay back it's creditors in junk - a devalued USD.
The actions of the Federal Reserve would have to alter dramatically to make me change course at this juncture of circumstances - but 'never say never' as they say. Trade what's there not what you believe should be so - similar to central bank surveillance rules - act upon what they do not what they say.
That need takes on an even sharper edge with the news that the IMF is considering giving the Australian dollar reserve currency status, which would help underpin demand for it.
http://www.businessspectator.com.au/bs.nsf/Article/Shell-Chaney-mining-…
This is interesting.....
I believe (right or wrong) that gold is being remonetized. That in the future the reserve status of the USD will be watered down.
We will hold gold and a basket of currencies. Gold will add a measure of stability totally absent today especially with regard to trade deficits. They have become structural and must have a mechanism to balance out.
Cheers
Obvioulsy the FX markets don't care about your preferences Roger ! surprise surprise.
Merry Xmas and maybe the new year will finally see the low for term rates that you have (rather frequently) picked over last three years, and maybe even some inflation (as Tui say yeah right !)
On a lighter note you have a lot of economists in the naughty corner for company ..but you should remember you qualified as an accountant ..not in the dismal science !
Kiwi probably peaked while a decision on fiscal cliff is made as traders wait the call on this. Long term the US Dollar looks doomed if they cannot control their debt. Same with Japan they too could default in the future. Is the whole global financial system going to collapse one day ? maybe 10, 15, 20 year from now ?
I think so Starfish unless massive money printing is stopped I just don't see how we won't hit a hyperinflationary wall with the great reserve currencies, USD & Stirling, leading the charge to the bottom, soon to be joined by the Yen I really don't understand how the whole global system won't crash.
If someone, prehaps Roger Kerr, could explain it to me in laymans terms?
I think New Zealand should leverage it's strong dollar to become a reserve currency in it's own right by backing it with a commodity, nationalise Fonterra and use milk powder for a really radical idea -just announce the intention to nationalise and the shareprice would probably fall though the floor making for a cheap acquisition, or PM, as the Southern Alps are one of only two known sites still still be producing a large amount of gold.
Economic suicide my ideas I'm sure.
I think its time for another 20% devaluation rather than wait for NZ/USD parity to arrive and completely knakka our exporters. OK it will push up the deficit and inflation probably for a bit but will give the fx punters a good fright and Wheeler can earn his pay dealing with any fallout.
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