Opinion: Extra supply of USDs lifts the kiwi

By Roger J Kerr The FX markets are supposed to be very efficient, even brutal, in pricing-in all the most likely financial/economic outcomes well in advance.  Interestingly, the global forex markets were arguably caught on the hop when the US Federal Reserve surprised them last week with the first wave of quantitative monetary policy loosening. Like any market when there is a sudden and unexpected extra supply sloshing around, the price can only go one way. However, I do not expect the USD to weaken above $1.4000 against the Euro, as the Europeans still have interest rate cuts and maybe quantitative Government bond buying to do of their own. The US authorities have been months ahead of the Europeans in remedial action since things blew up in the credit crunch in September 2007. Whether the Kiwi can sustain the higher rates above 0.5600 other than in the short-term is a mute moot point. In the short-run 0.5800 is very likely, but the GDP figures loom on Friday and may hold back further Kiwi buying. The market is expecting a rough negative number for the GDP in the December quarter, -1.1% or -1.2%. The global recession will be blamed, but most of the contraction in the economy late least year was due to our own tight monetary policy (2005 to 2008) gutting the retail and manufacturing sectors. Our own forecast is for a slightly smaller contraction of -0.8%, thus heavy Kiwi selling is unlikely on Friday as the figure is not as bad as consensus forecasts. This flurry up in the Kiwi will be reasonably short-lived in my view, as I expect the USD to recover to $1.3000 against the Euro over coming weeks. In the medium term, by June/July, I would expect improving NZ consumer and business confidence to be signalling a more sustainable Kiwi uptrend from the mid to low 0.5000's. ---------------- * 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