Opinion: Kiwi dollar linkages not broken yet

By Roger J Kerr The "Dow Jones Index Syndrome" continues to plague the Kiwi dollar. Strong gains on Wall Street propelled the Kiwi higher to well above 0.6800 in the forex markets on Friday night. There needs to be a catalyst to break this linkage as the higher NZD/USD rate is lifting all the cross-rates to other currencies with no respite in sight. At some point - and I am not sure when - the international currency traders and speculators who have been buying Kiwi dollar will be forced to sell them all in one big hurry when they realise that our economy is horribly under-performing neighbours in Australia. The question is how much higher will the Kiwi go before the inevitable reversal occurs? Better than expected economic data in the US causing the US dollar to be sold on currency markets does not make much sense to me either. The market sentiment will turn and the high flying Kiwi that has gone up the elevator shaft on this occasion will go back down by the same route. Our exporters in USD who followed Asia-Pacific Risk Management's recommendations from December 2008 to March 2009 to lift hedging to the maximum of their policy limits when the NZD/USD rate was in the low 0.5000's should now be seriously contemplating unwinding their hedges or replacing forward contracts with NZD call options. The risk that these exporters hedged against (a rising NZD to the mid to high 0.6000's) has already occurred, so there is no reason to continue such a high level of hedging. USD exporters who failed to get such hedging in place for whatever reason need to have some fortitude here and just hedge to policy minimums with NZD call options only. I am convinced that the world is not about to sell the USD down the river. Given all that has happened to the US economy over the last 24 months, if the FX markets wanted to sell the USD to a much lower level they would have already done it by now. They have not done so, with the USD/EUR rate trading around $1.40/$1.44 for several months now. The US will be increasing their short-term interest rates well ahead of the Europeans. Un-hedged USD exporters sitting in New Zealand will be hoping that this timing will cause the USD to make gains against the euro (and thus the Kiwi) over coming months. "”"”"”"”"”- * Roger J Kerr runs Asia Pacific Risk Management. 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