Opinion: Four factors to watch for the Kiwi

In the short-term over coming weeks I see four major influences on the NZD exchange rate that will determine its next direction from the current 0.6120 level. 1. The inevitable upward correction in the AUD/USD exchange rate must pull the NZD/USD rate up to some extent. The AUD has depreciated 30 cents from 0.9800 to 0.6800 in less than three months. No currency falls that far without some bounce. The speed and extent of that fall must lead to a period of rebound caused by profit-taking on short-sold AUD positions. Whilst global commodity prices continue to fall the AUD will not stage any kind of upwards correction. As soon as hard commodity prices stabilse, the probability of a major upward move of 5 to 10 cents must be on the for the Aussie dollar. I would not anticipate that the Kiwi will go all the way up with the Aussie when this happens, thus a quick return of the NZD/AUD cross rate to 0.8400/0.8500 would be the result. 2. This week's expected 1.00% cut in the OCR should result in NZD selling on its own account on the day. In the unlikely event that the RBNZ totally mis-read the situation and only cut by 0.50%, the Kiwi would shoot up 2 or 3 cents as our interest rates stay well above overseas rates. Dr Bollard is not expected to disappoint in this manner. Inflation figures for the September quarter before Thursdays OCR change will have no impact as oil and food prices have subsequently reduced significantly. 3. The 8 November NZ general election result may be mildly positive for the NZD if there is a change to a National-led coalition. The markets would expect business confidence to increase on this outcome and thus the economic outlook not as gloomy as other potential political results. Should the political opinion polls close right up and votes for the minor parties are strong, allowing Labour to cobble together a government again, the reaction by the forex markets might not be so favourable. Labour's leadership are not seen as having the capability to change economic policy to improve growth and move quickly out of recession. 4. The decision by Finance Minister Michael Cullen not to follow the Australian Government to guarantee the banks' wholesale borrowings from international debt markets must be seen as big negative for the NZD exchange rate value. Why would any global bank or investor lend to the NZ arm of an Aussie bank where there is no Government guarantee, when a guarantee is available for a similar AUD investment into the bank's Aussie parent? Dr Cullen's argument is that the NZ taxpayer should not be guaranteeing anything for shareholders of Australian banks. The NZ arms of the Aussie banks do not have access to global debt markets, they have limits to how much they can borrow from their parents in Australia, so they will all be busy packaging-up mortgage assets to discount as a MBS with the RBNZ. This anomaly cannot be positive for the debt markets or the currency despite what the Treasury and RBNZ say.   My net/net summation of these events and forces is that the Kiwi does stabilise for several weeks now in the 0.5800 to 0.6200 trading range. --------------- *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