By Roger J Kerr
Narrow NZD/USD trading range holds firm
Volatility in the NZD/USD forex market did certainly increase over the Christmas/New Year holiday period (as it normally does) when markets are less liquid and movements therefore exaggerated.
The Kiwi dollar tested both ends of the 0.8100 to 0.8500 trading range that it has been in place for more than six months now.
Initially, in the lead-up to Christmas, the weaker than expected NZ GDP growth result and unwinding of long NZD market positions sent the Kiwi reeling downwards to lows of 0.8160.
The US fiscal cliff 'patch-over' job before 1 January was sufficient to appease equity markets (for the meantime) and a rising Wall Street soon had the NZ dollar recovering back upwards.
Strong Chinese economic data and a stronger Euro currency value against the USD since have propelled the Kiwi back to the top end of the range.
However, yet again we witness that the Kiwi does not attract many new buyers above 0.8450.
Looking ahead to the forces and trends likely to influence the Kiwi dollar in 2013, the following summary of pluses and minuses probably concludes that we stay in and around the well-established 0.8100 to 0.8500 trading range in the absence of major unanticipated events.
| NZD Positives | NZD Negatives |
|---|---|
| Global investor demand for NZ Government Bonds | USD itself to strengthen against all currencies as the US economy and long-term interest rates lift |
| Chinese demand pushing hard commodity prices higher, thus stronger AUD against USD | European market blow-ups that have caused NZD plunges lower over recent years now less probable; however they cannot be ruled out altogether |
| Improving global economy positive for world equity markets, thus risk assets/currencies benefit | Australian domestic economic data deteriorates further, forcing the RBA to cut interest rates |
| Whole milk powder prices stable to higher | Rising US long-term interest rates prove negative for all commodity markets |
| NZ GDP growth near to 3% still superior to most others | Weaker Current A/c and Budget deficit positions in NZ force credit rating agencies to downgrade NZ |
| Australian institutional investors buying Kiwi dollars to invest in NZ share market IPO’s | Australian and NZ “Terms of Trade” positions weaken on lower commodity prices |
| NZ house price: NZD correlation supporting the elevated NZD value |
Assigning probability weightings to the list of the NZD negatives (apart from the first one) would see low percentages and about as much chance of occurring as the NZ cricket team making it to the fifth day of a test match!
However, above $1.0500 the AUD still appears over-valued on fundamental measures.
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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
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