Roger J Kerr now sees several factors leaving the New Zealand dollar open to a sell-off in FX markets; one factor not being reflected in the market yet is the possibility of a hung Parliament after September 23

By Roger J Kerr

The Kiwi dollar has rebounded back to above 0.7300 from selling last week on speculative profit-taking that forced it lower to 0.7200.

The rapid recovery does not appear to have much to do with the NZ economy or our export commodity prices, instead the currency movement back up is more related to some strong gains by fellow commodity currencies, the Australian and Canadian dollars.

The decision by the Bank of Canada to increase interest rates prompted Canadian dollar gains against the USD last week.

The Aussie dollar followed the Loonie (Canadian dollar) higher.

Also assisting Aussie dollar gains has been a sharp reversal back up in one of their key metal/mining prices, iron ore.

Positive economic numbers in China and improving GDP growth rates around the globe seem to be behind the recent recovery in iron ore prices from below US$55/MT to currently US$63/MT. Just how sustainable the gains are in iron ore prices remains to be seen. Iron ore inventory levels in China are at record high levels, therefore a pullback in demand and prices from here appears more likely than further price increases.

The AUD/USD exchange rate has roared above previous resistance levels at 0.7700 and currently trades at 0.7830.

Whilst the NZD/USD rate has also appreciated against the USD, the extent of the gains has been considerably less than the Aussie dollar, therefore the NZD/AUD cross-rate has dropped back to below 0.9400. A lower NZD/AUD cross-rate from 0.9600 to below 0.9400 was expected through this period, however my view was that it would be caused by individual and separate NZD weakness, not AUD strength to 0.7800 against the USD.

The Aussie dollar’s new found strength may prove to be short-lived if Chinese GDP growth and other Chinese industrial production and retain sales data due out today (Monday 17th July) disappoints the markets.

We also have the RBA releasing their July meeting minutes today and their re-confirmation of keeping their very low 1.5% interest rates for a long time yet (in the face of other central banks around the world starting to end their easy/easy monetary policies) may reverse the recent AUD gains.

The Australian and NZ dollars have also benefited from FX funds cycling out of the US dollar as Fed chief Janet Yellen was less than convincing with her Congressional testimony in front of the politicians last week of sticking vehemently to her planned US interest rate increases.

Lower than forecast US inflation in June boosted the US dollar bears who believe the Fed will have to adjust their planned interest rate increases in timing and amount. The EUR/USD rate has increased to $1.1500 over recent weeks (weaker USD) as the currency markets back the US short-term interest rates markets in taking the stance that the Fed will be forced to slow down their rates hikes. Only stronger than expected economic activity and inflation data in the US will reverse these recent trends.

In my opinion, the recent movements in both the USD and AUD place the Kiwi in an even more of a vulnerable position to a sell-off in the FX markets than previously, for the following reasons:-

• The AUD is certainly at risk to reversing its recent gains if iron ore falls and the RBA express concern about the AUD strength being at odds to their economic fundamentals (i.e. low mining commodity prices).
• Open futures contracts in the US that are long NZ dollars remain at record high levels and these speculative positions are at risk of being reversed (i.e. NZD selling) if there is a catalyst to prompt such behaviour.
• President Trump’s import trade investigation report is overdue and when it does arrive it will be negative for the Kiwi dollar if agriculture products are included in with new US import tariffs.
• The Kiwi dollar FX market has yet to reflect any political risk in connection to the upcoming 23 September general election. An inconclusive/hung Parliament result is hardly likely to be Kiwi positive.

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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