Opinion: NZ$ rose prematurely; Fonterra forecast & swine-flu will drive it back

By Roger J Kerr The dominant force behind the NZD gains against the USD from 0.5500 to 0.6400 over recent weeks has been the appreciation of the Aussie Dollar. The Kiwi tracks the Aussie very closely, as evidence by the very stable NZD/AUD cross-rate at 0.7900. The Aussie has certainly been a major beneficiary of global FX markets moving out of USD and seeking a safe alternative. Coincidentally with this unwinding of USD positions, commodity prices have been on the rise as world economic data turns out to be not as bad as many feared and internal Chinese infrastructure demand replaces their much reduced export manufacturing. For local USD exporters who do not have sufficient NZD/USD hedging on board and are waiting for a return to below 0.6000, the big question is whether the dramatic run-up in commodity prices and the AUD against the USD are sustainable? Recent Australian economic data of positive GDP growth and much improved consumer/business confidence supports the stronger AUD position. The China factor is also good news for Australia, although the Chinese are miffed that Rio Tinto went with BHP on the iron ore and not with their Chinalco deal. My view remains unchanged that the AUD gains are too fast, too quick and a recoil in the AUD/USD rate from 0.8100 to 0.7500 is more likely than a push on to 0.8500 over coming weeks. The aggressive buying of commodities over recent weeks also appears over-cooked as well. Although a lot of the buying is profit-taking by speculators who short-sold commodities at the record high levels 12 months ago. The same could be said for the AUD buyers. Many international economic leaders are now tempering their global GDP growth forecasts to a hard slow grind out of recession. The recent burst upwards in commodity prices is inconsistent with that picture and appears over-done. The expectation that the NZ economy would enjoy an export-led recovery out of recession earlier than other countries is now under some threat. The sharp revision down in the Fonterra milksolids payout forecast to dairy farmers and swine-flu implications for the tourism industry are two very real risks to that view. The NZD has appreciated prematurely and should come under some downward pressure from these two factors over coming months when the global currency markets re-rate their attitude and sentiment towards the USD. Patience will be rewarded for USD exporters targeting 0.5800 to 0.6000 to enter some forward hedging.