Opinion: Why the Kiwi won't fall to 0.4000

Higher global sharemarket volatility, lower NZ interest rates, maturing uridashi/euro-kiwi bonds and small currencies being right out of favour with international investors have weighed on the Kiwi over this last week. The "relief" rally from the change of Government a week ago was very short-lived indeed. Now that the Kiwi has depreciated 30% to 0.5500 from 0.8000 in February, several pundits are picking that the Kiwi can go all the way to 0.4000 before it stabilises. I disagree on this prognosis and forecast for several reasons, namely:- - The last time the Kiwi was at 0.4000 in 2000 the USD itself was at a very strong point ($1.0000 to the euro) with global funds pouring into USD tech-boom investments. We do not see the USD continuing to strengthen to this extent again. The USD is more likely to remain in the $1.20 to $1.25 region against the euro over coming months as their respective interest markets catch up to the FX markets pricing. In marking the Euro weaker from $1.60 a few months ago to $1.25 today, the FX markets are concluding that the Europeans will be cutting their interest rates to 2.00% from the current 3.25%. - NZ interest rates must be getting near the end of their run down. The FX markets have arguably already priced-in a 5.00% OCR in early 2009. They will not continue to dump the Kiwi lower on an expectation of lower NZ interest rates, the interest rate expectation is already being delivered. - Our food commodity prices have a reasonable chance of stabilising over coming months, increasing the chances of the NZ economy coming out of recession in 2009 earlier than others. - The carry-trade and margin FX players were all stopped-out of their loss-making long Kiwi positions last month. The foreign investors who wanted to get out of the plummeting Kiwi have also already exited. The big capital-flow related NZD sellers are all done in my view.    --------------- *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