Opinion: the kiwi's prospects

"The NZD/USD exchange rate is finally settling after the wild roller-coaster ride over recent weeks. RBA intervention has stopped the AUD rout of two weeks ago. We are seeing the inevitable rebound up in the AUD against the USD that we were expecting. The Kiwi has bounced off lows of 0.5400 last Tuesday to trade higher to 0.5900. My view is that Government and central banks around the world have now done enough to settle global sharemarkets and financial markets. Interest rate and currency markets are starting to stabilise and volatility reduce. At some point you have to have the faith that the bank rescue and bail-out measures are working. I think we have reached that point. The G20 meeting in a couple of weeks should provide further assurance as to the coordination and commitment of the major nations to get through, and work out of this economic/financial crisis. What does all this mean for the Kiwi dollar? My summation of the position and outlook from here is as follows:- - It is too early to tell how deep the recessions will be in 2009 in the major economies as we enter the phase two of the financial crisis "“ the impact on the real economy from restricted credit and lower consumer demand. Commodity price movements over coming months should provide some lead on this. The Kiwi and Aussie currencies should stabilise at or about current levels if our respective commodity prices stop falling. - The Japanese FX margin-traders and carry-trade merchants invested in the Kiwi have now all been "stopped-out" from their long NZD positions. The Kiwi selling from this source is now much reduced. Uridashi NZD denominated bond maturities average NZ$1 billion per month over the next 12 months. We are not seeing any new bond issues, thus net NZD selling each month will be the norm as the investors return their money to Japanese Yen. - Six months ago we forecast the USD to strengthen from $1.60 to $1.25 against the Euro. The USD has now fulfilled that forecast. From here I do not see continued USD strength. I do not see USD weakness either, but the big move has already happened. - The gap between US and NZ 2-year interest rates suggest a NZD/USD rate at 0.6500, not 0.5000. - The US Presidential election outcome with Barrack Obama winning should be mildly positive for the USD. A clear National Party win in NZ will be positive for the Kiwi, but the more probable scenario of waiting for hui results as to who the Maori Party will go with will be a short-term negative for the Kiwi dollar. - Lead indicators for the NZD/USD exchange rate such as the US ISM manufacturing series and house prices suggest a Kiwi around the mid-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