Opinion: Pre-conditions for NZ$ to fall below 60 USc moving into place

By Roger J Kerr The NZ dollar exchange rate has lost most of its upward momentum against the USD and is appearing more vulnerable to a decent pull-back to below 0.6000. Whether the forex market has the will and capacity to sell the Kiwi dollar down in the short-term largely depends on what happens to maturing NZD denominated Uridashi/Euro-Kiwi bonds and global US dollar/commodity price movements over coming weeks. The confidence by international currency traders and speculators to buy the NZ dollar as an alternative to a weakening USD currency value has certainly waned over recent weeks. The failure of the Kiwi to push on higher above 0.6500 has prompted many players to take their profits (i.e. sell Kiwi) on long NZD positions purchased earlier. The local foreign exchange market does not appear at all confident that more than 30% or 40% of the $4.5 billion of the Uridashi/Euro-Kiwi bonds maturing this month will be renewed into new NZD denominated investments. A low reinvestment rate will mean large-scale NZD selling and the market is already building this expectation into their daily positioning and pricing. What this means is that very few traders are willing to hold long NZD positions at this time. Even though term NZ interest rates may be 3% of 4% above those achievable in Japan, their retail investors appear not to have the same appetite for exotic currency investments at this time. The Kiwi dollar continues to be buffeted around by short-term USD, commodity price and US sharemarket movements day-to-day. The USD currency itself has stopped weakening against the Euro at $1.4000, as was anticipated. However, unless commodity prices weaken back down, the USD does not seem it can make major gains yet. US economic data continues to be mixed with some lead indicators such as forward business purchase orders improving, but on the other hand, still massive job losses in many industries continue. The downturn in US industrial production, housing, retail and employment is as dramatic as the 1970's oil crises, surpassing the shorter economic recessions in 1990, 1998 and 2001. Whether the USD can strengthen against this poor economic backdrop is a matter of much debate. There are however good reasons for optimism for a USD currency recovery from current levels:-

• The US economy is set to recover ahead of Europe, resulting in US interest rates rising ahead in time over Euro interest rates.
• The US Current A/c deficit is rapidly reducing as exports exceed much reduced imports.
• The USD value moves inverse to commodity prices. The rally upwards in commodity prices in recent months looks to have run its course. The commodity gains were largely due to speculators buying back short-sold positions taken out last year. The underlying industrial demand is nowhere near as strong as the commodity price gains suggest. Weaker commodity prices over coming months will be positive for the USD and negative for the AUD and NZD currencies.