Kiwi dollar continuing to outperform all other currencies against a stronger greenback

By Roger J Kerr

It seems to have been a typical Christmas/New Year trading pattern for the Kiwi dollar across the currency markets over recent weeks. Thin and illiquid holiday markets exaggerating day-to-day movements to wider trading ranges, however a greater tendency for the Kiwi to appreciate due to trade-related buying on the dips.

Yet again the NZ dollar has bounced off the 0.7620 area and has been a standout performer of all currencies against the stronger US dollar global trend. There is no question that the higher 4.00% interest rate yields available in an economy that is out-performing others makes the Kiwi dollar attractive to global investment/trading players when they want an alternative to the USD.

Standing back from short-term forex rate movements, the level of the NZD/USD over recent months has confirmed our prior expectations that through the second half of 2014 the Kiwi would stabilise around the 0.7700 region. The near terms forecast trading range has to remain between 0.7600 and 0.7900 with exporters replacing used-up hedging at the lower end and importers topping up the hedgebook at the 0.7850 area. In terms of the medium term drivers of the Kiwi dollar’s direction not a lot has changed.

So much for what has happened in the past and which you have already read about in the newspaper! (or more likely on the I-pad over your breakfast cornflakes).

What is more important is where the NZD/USD rate will travel over coming months. More of the same is my central view with perhaps a marginal bias lower as the US dollar still has plenty of legs from its 2014 strengthening run.

Some local and global economic/financial market themes for early 2015 and their likely impact on the Kiwi dollar are summarised something like this:-

• Central bankers will continue to be perplexed and confused by deflationary forces and lower than expected inflation outcomes. Outside the US and NZ, weak consumer demand, lower energy prices and weak employment markets are the main reasons for stable to lower prices of goods and services. A weaker Euro and stronger USD is the result, however much of the needed adjustment down in the Euro’s value may have already taken place.

• Oil price action over recent weeks and months may on the surface suggest that there is a fundamental miss-match between physical supply and demand for oil. However, the panic selling of oil seems more related to closing out of derivative positions and/or hedging of oil price risks embedded in loans/securities by financial players and investors than a massive collapse in global physical demand. Crude oil prices below US$50/barrel will eventually cause physical market production to reduce and buyer forward hedging to increase and cause a price recovery. We must be close to the oil derivative panic running its course. I would expect metal and mining commodity prices to recover somewhat with any stabilisation/rebound in oil and with that the Aussie dollar should out-do the Kiwi against the USD and pull the NZD/AUD cross-rate back further from the 0.9600/0.9500 overshoot.

• Milk powder prices are finally finding some feet as the inventory overhang in China is worked through. Just like oil, the lower prices will be a disincentive for new production and may eventually decrease supply. Adding to some natural supply constraint is a looming dry summer across New Zealand. With the potential for milk powder prices to recover, a past negative for the NZ dollar is removed.

A continuation of the 0.7600 to 0.7900 trading range is a higher probability scenario over coming months than a move outside the now established band.

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