Here are the likely responses in the currency markets to the NZD from the various forces that are about to play out, from local data, to capricious American policy jerks, to ECB tapering

By James Riley

The Kiwi dollar has rebounded upwards nearly two cents from the lows of 0.6850 a month ago to trade comfortably above 0.7000 over this last week.

Yet again, the New Zealand dollar has proved its resilience and considerable support in the 0.6800/0.6900 region.

However, a commentary on what has already happened in the FX markets over recent times is not that useful to those with foreign exchange risks. They are, of course, far more interested in well-constructed arguments as to what factors will force the currency higher or lower in the future. An opinion as to whether the NZ dollar will appreciate or depreciate going forward is also only of value to the reader if the viewpoint states how far the exchange rate will move, over what time period.

The considered opinion of the author is that the NZD/USD exchange rate will remain contained within its new trading range between 0.6850 and 0.7250 over coming weeks and months.

Stable cross-rates for the EUR/NZD, GBP/NZD, JPY/NZD and NZD/AUD are likely over the coming period as the dominant determinant of NZD/USD movements will be what the USD itself is doing on global FX markets against those aforementioned currencies. Therefore, NZD/USD exchange rate movements will be matched by the major currencies against the USD, resulting in stable cross-rates. Significant changes in the NZD cross-rates (EUR, GBP, JPY and AUD) can only come about if there are separate and independent local forces that shift the NZ dollar against the USD on its own accord.

Upcoming local economic announcements that are likely to have some bearing on the NZ dollar in its own right include the GDP growth figures for the March quarter on 21 June and the June quarter’s inflation numbers on 17 July.

Consensus forecasts for GDP growth are for a +0.80% outcome, however it is likely to surprise on the softer side. Over recent weeks, indicators of overall economic expansion in the March quarter have generally printed weaker e.g. wholesale trade, retail, exports and construction. The Kiwi dollar will be sold if a +0.40% or +0.50% result is confirmed and this will indicate that we are headed for a much lower than expected 2.00% annual growth rate for this year, considerably below the RBNZ and The Treasury GDP growth forecasts which are above 3.00%. There is no question that many local business firms are holding back from expansion and investment projects at this time because of the uncertainties surrounding the future employment, taxation, housing market and foreign investment environment due to Government policy changes. Many local economic forecasters are continuing to underestimate the impact the persistent low level of business confidence will have on the real economy going forward.

Global financial/investment markets will be disappointed at the continuing inconsistent and contradictory statements coming from US President Donald Trump at the G7 summit meeting last weekend in respect to trade protectionism and tariffs. Trump’s refusal to endorse the G7 final communique on free trade will elevate the trade wars risk factor in the markets. Whether the American’s march to trade isolationism will depress the value of the US dollar is a debatable point. Rising interest rates and robust economic data should keep the US dollar strong against the major currencies this year; however, their ballooning internal fiscal deficit in 2019 will be a US dollar negative.

The European Central Bank will start their dismantling of the GFC-era crisis monetary stimulus this month, however renewed Euro currency strength due to this change is not anticipated as the change is widely expected and already built into current FX prices. Expect to see the EUR/USD exchange rate to remain in the $1.15 to $1.20 trading range.

The historic meeting between President Donald Trump and North Korean leader Kim Jong-un in Singapore this week is not expected to shift currency values. Unless of course, the Donald does something totally outrageous and nuclear war risks increase rather than decrease!