The rise of the greenback may have run it course as markets accept the ECB is a long way from unwinding, and the American economy's growth is uncertain. The Kiwi dollar is under much less pressure now

By James Riley

It is very instructive for the future direction of the NZD/USD exchange rate that the expected support at the 0.6850 level has held firm over this past week in an environment of general US dollar strength against all other currencies.

The Kiwi dollar has performed well, rebounding to above 0.6900, whereas other major currencies have slid in value against the rejuvenated US currency over the same period.

The standout Kiwi dollar resistance has been because all the speculators who wanted to sell out of the Kiwi had already done so and there was no further selling interest in any volume to move the market. As anticipated, local exporters where active buyers of the Kiwi at the lower levels to hedge future USD receipts.

The overall US dollar currency index has shifted higher to 94.6, its highest point since last November. It has taken a while, however finally rising US interest rates has pulled the US dollar upwards after it lost value through the earlier part of the year on Trump political uncertainties and misguided expectations that the Europeans would follow the US with interest rate increases. The Euro strengthened on the back of this view in January and February.

The currency markets now realise that the Europeans are a very long way away from ending their monetary stimulus programme and increasing their interest rates. Weaker European economic data since the start of the year and more recently the changed political landscape in Italy has weighed the Euro currency value down over recent weeks. The USD has appreciated 7% against the Euro since $1.2550 in mid-February to $1.1650 today. The NZD/USD rate has also reduced 7% from 0.7400 to 0.6900 over the same time. Whilst US dollar gains on global forex markets have pulled the Kiwi lower over recent months, a benign RBNZ and local business confidence levels remaining low have been additional negative factors for the currency.

Looking ahead, further significant US dollar gains against the Euro are not expected as the FX markets have now fully priced-in the 2018 US interest rate increases. It would require significantly stronger than forecast US economic data that boosts GDP growth and thus inflation well above Federal Reserve expectations to propel the US dollar below $1.1500 against the Euro. However, US economic lead indicators are not suggesting another surge higher in activity and employment levels over coming months.

Increasing US interest rates will temper consumer and business confidence, as well as business investment. As the EUR/USD exchange rate settles into a new $1.1500 to $1.2000 trading range over coming weeks/months, correspondingly the NZD/USD can also be expected to remain in a relatively tight 0.6850 to 0.7150 range.

Outside of the USD and AUD currency movements, other important determinants of the New Zealand dollar’s fortunes are our agriculture commodity prices and the prices for residential property. The NZD/USD exchange rate has a reasonable correlation to both price series.

While the rate of appreciation of house prices has certainly slowed back over the last 12 months (particularly in Auckland), there is not a major correction downwards in prices at this time. Even though immigration levels are easing somewhat, the demand for houses still exceeds the supply, therefore tumbling prices are highly unlikely.

While increasing mortgage interest rates in 12 months’ time may well cause more of a downward correction in house prices, the Kiwi dollar should not suffer too much as the rising interest rate environment will be a positive force for the currency. The Americans will be near the end of their interest rate increase cycle by mid-2019 and we will just be starting to lift ours, a recipe for Kiwi dollar strength back to the mid-0.7000’s.

On the commodity price front, dairy, sheep meat and forestry prices remain at buoyant levels and suggest that the NZD/USD exchange rate should be higher than 0.6900 at this time. While no-one is forecasting a collapse in these commodity prices, further significant increases seem unlikely from here. The prospect of new free-trade agreements for New Zealand with both the UK and the European Union is certainly a positive for the NZ economy and currency value. However, the considerable uncertainty that the flip-flop statements from US President Donald Trump on tariffs and trade wars is not a positive for an international trading economy such as ours.