Roger J Kerr says with all the good news for the NZ economy already out, it's questionable how much better things can get for the NZ dollar

By Roger J Kerr

Having raced up to 0.7200 from lows of 0.6820 only a month ago, the NZ dollar is now taking a breather and awaiting the next financial market, economic and potential political developments.

The economic fundamentals for the New Zealand currency remain very strong indeed with high export commodity prices across the board, global economic growth trends more positive and a booming domestic economy from strong immigration and construction activity.

With everything so resoundingly positive, what can go wrong? (Apart from losing a yacht race!)

Foreign exchange markets are always looking a long way forward and pricing in likely future economic and market conditions into the exchange rate today.

All the good news for the NZ economy is out and known and with the previous house price appreciation fuelling confidence now levelling off somewhat, the question as to be asked as to how much better it can get?

The forex markets may well start to factor in future NZ economic performance perhaps not being as strong as the buoyant conditions we have enjoyed to date.

Certainly, it would be a surprise if dairy and other key commodity prices like lamb, beef and logs continued to rise at the rate they have been going.

Some consolidation and correction in price levels seems more likely.

Locally, the construction industry is at capacity constraints and existing and potential bank lending regulations from the RBNZ is clearly having an impact to slow the residential property market down (as they are intended to do).

Therefore, the domestic economy is looking to the fiscal impulse coming from the Government with tax adjustments next year to keep it rolling on.

Outside a major sell-off in the US dollar itself on global FX markets, it is increasingly difficult to see what future news could be even more positive for the NZ dollar to propel it higher above 0.7200.

Over recent weeks the US dollar has weakened to $1.1200 against the Euro on the financial and investment markets expressing concern that President Trump will not have the political support to action the long promised pro-growth economic policy initiatives.

The pledged corporate tax cuts and large scale infrastructure investment programmes just seem further away.

The EUR/USD exchange rate has however stalled and stopped at $1.1200 with the USD not weakening any further over this last week.

Much hangs on what US Federal Reserve boss Janet Yellen says about the pace and extent of future interest rate increases in 2018 after the next lift in rates this week.

Whilst US economic data has been mixed of late, the Federal Reserve are not likely to change their consistent and predictable plan to normalise monetary policy settings.

Following the Federal Reserve meeting the US dollar is expected to recover back to $1.1000 against the Euro which will pull the Kiwi dollar back below 0.7200.

The potential negatives for the Kiwi dollar going forward have been previously discussed, however they are still relevant to the direction over coming weeks and months:-

• The US import trade investigation on what products and countries are taking US jobs will have the report released with the next few weeks. The findings are unlikely to be favourable for the NZ economy if stiff US import tariffs are the answer. Any increase in global trade protectionism is viewed as negative for the Kiwi dollar.
• Profit-taking by currency speculators in the NZD/AUD cross-rate has to be expected following the spectacular NZD appreciation from 0.9200 to 0.9570 over recent weeks.
• If the National Party does not improve in the next political opinion polls following the favourable May budget for most households, the FX markets will start to reflect a higher level of political risk around the September general election.

The overall sideways movement of the NZD/USD exchange rate between 0.6800 and 0.7400 over the last 12 months is expected to continue for the next six months at least.

The six cent trading range from the high to the low over the last 12 months has been one of the most stable period for the NZ dollar for many years.

The average annual high to low movement over the course of a year over the last 20 years has been over 12 cents.

At a value of 0.7200 to the USD the NZ dollar has to be considered neither undervalued nor overvalued and the sweet-spot conditions are keeping both importers and exporters competitive and happy.

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Roger J Kerr contracts to PwC in the treasury advisory area. 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