Opinion: NZD bad news fully priced, but it can still go lower

The recovery in the NZD/USD rate from the lows of 0.6500 to above 0.6800 is a combination of a weaker USD in the short-term, a stronger AUD and some investor inflows into the Australasian banks (and currencies) as their high credit-standings attract money looking for somewhere safe. The current spike up in interbank 90-day wholesale interest rates to above 8.00% should only be temporary. Poor interbank liquidity as bank credit limits are restricted yet again is a feature of markets all around the world and central banks everywhere are pumping extra liquidity into the markets. The 30 September financial year-end for the Australasian banks here compounds this short-term problem. My expectation is that the four cent rebound/correction upwards in the NZD/USD rate is only temporary as well, and the overall Kiwi downtrend is still on-track. We witnessed very similar four cent recoil in mid-August from 0.6800 to 0.7200, but the selling interest quickly re-emerged. The markets are still pricing in two more 0.50% cuts in the OCR by year-end and the NZ economy is firmly in recession. It remains very difficult to find any good reasons why international investors would be buyers of the NZ dollar currency in the current environment. A weaker global economy should lead to further falls in metal and mining commodity prices as demand reduces. The Australian dollar will not make gains against an environment of lower commodity prices. The NZ dollar has returned to tracking the AUD very closely, resulting in a now stable NZD/AUD cross-rate around 0.8100/0.8200. All the bad news on the NZ economy and lower interest rates is arguably fully priced into the NZD/USD rate. NZD/USD direction over coming months will therefore be largely determined by USD movements internationally, and I see a return to the USD strengthening trend against the Euro back to $1.40 and lower. Having said that, one can expect individual NZD selling on the day when the OCR cuts are actually announced by the RBNZ on 23 October and 4 December. ------------------ *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 <a href="<a href="http://www.rogeradvice.com/">http://www.rogeradvice.com/">rogeradvice.com.</a</a>>;