Opinion: Weaker USD unsustainable

By Roger J Kerr The "strength" of the NZ dollar over recent weeks, as it appreciated to above 0.5700 against the USD, has surprised many pundits who were very sure about their view that the kiwi was heading to 0.4500 and 0.4000. Certainly one of the initial drivers of the Kiwi upwards was the unwinding of short-sold NZD positions after the RBNZ's Monetary Policy Statement in early March was not as gloomy on the economy as many had hoped for. That short-term, interbank FX market re-positioning lifted the NZD/USD rate to 0.5200 from below 0.5000. The gains to 0.5700 since have much more to do with a weaker USD against all currencies, after the US Federal Reserve moved to the next stage of monetary stimulation. The pumping of more USD's into their banking system by the Federal Reserve through buying Treasury bonds from the secondary market is the "quantitative easing" measure they undertake when they cannot lower interest rate any more. The FX markets seemed surprised by the sudden new and additional supply of USD's and immediately marked the USD exchange rate lower. The USD fell from $1.25 to $1.35 against the euro. The kiwi followed the other major currencies higher against the weaker USD. From current levels there really has to be serious doubt that the euro exchange rate can retain its recent gains against the USD. Economic data continues to deteriorate in the UK and Europe and the European Central Bank still has room to cut their interest rates to zero (currently 1.5%) The EUR could not hold above $1.3500 in the FX markets and looks more vulnerable to returning to $1.2500. The expected USD recovery should stop further NZD gains above 0.5700 and send it back to below 0.5500 over coming weeks. At the same time that European economic data is becoming worse, there are early and tentative signs with US retail and factory orders data that the worst may be over for them. Some cautious confidence returned to the US sharemarket last week, perhaps more relief that the daily news is not as negative as what it has been in recent months. The G-20 nations meet in London this week, the financial markets will not be expecting too much in terms of global economic solutions. However a sense of cooperation and coordination on economic policies and regulatory responses in the world of banking and investment would be seen as a positive. Restoring investor confidence remains a key objective for policy makers around the world. ---------------- * 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