By Roger J Kerr The Kiwi dollar has already depreciated 30 cents (36%) against the USD over the past 12 months (from 0.8200 to 0.5200), yet still many forecasters predict it to go even lower over coming months. I struggle to find the strong arguments to support a negative NZD outlook. Sure, the economy is in recession, S&P have a negative watch on the Government's credit rating and the current account deficit is over 8% of GDP, but none of this is fresh or enlightening news to frighten foreign investors and their money out of New Zealand. This is because most of the international "hot" speculative and portfolio investment monies have already long departed our sunny shores.
Most of the short to medium lead-indicators for the NZD/USD exchange rate value align precisely with its current market value of 0.5300 against the USD. None of the top four Kiwi-dollar drivers i.e. interest rate differentials, commodity prices, the USD currency Index and the US sharemarket value (Dow Jones Index) point to a NZD/USD rate below 0.5000 and two of them suggest a rate nearer 0.6000 than 0.5000. The heavy selling out of the NZ dollar over the last 12 months has fully priced-in the much lower market interest rates now prevailing. When the RBNZ cut the OCR by 1.00% to 4.00% this Thursday, the Kiwi dollar is more likely to appreciate than depreciate. The moneymarkets are pricing-in larger and further cuts, but the FX markets have already priced-in NZ interest rates at such low levels some time ago. Again, falling interest rates is not fresh news for the forex markets and will not push the Kiwi lower at this time. Having stated all these reasons why the NZD should not fall a great deal further, there are no compelling forces to send it higher either. Eurokiwi and uridashi bond maturities are still running at NZ$1 billion per month on average this year and this net selling (i.e. no new bond issues to replace) will limit any Kiwi dollar gains. The USD itself should remain relatively stable in the $1.25 to $1.35 range against the Euro over coming months. I do not see major movements in the Kiwi this year due to large USD currency value on the global stage. US interest rates can only go upwards and the US economy will eventually recover ahead of Europe. No reason for the USD to be dumped, despite the dual deficits and massive printing of money and Government debt/bond issuance. The remaining driver of the Kiwi is the Aussie dollar. Currently the NZD is underperforming the AUD against the USD as the NZD:AUD interest rate differentials close up. Eventually this interest rate gap will widen out again, lifting the NZD up against the AUD. Australia will be more adversely affected by the global recession than NZ, as they export mining and metals to Asia which goes into the manufacture of consumer goods which are at the discretionary end of global spending. NZ exports food and is in a different position to Australia. The AUD is also not likely to appreciate too much in this environment and this could act as a limitation on NZD gains, even though our economy is expected to recovery ahead of Australia. It may not be the pattern and norm of recent years, but my view is that the NZD will trade in a much narrower range in 2009 than previous years. And the reduction in volatility is what our exporters and importers need at this point. ------------ *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
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