Opinion: Stronger USD likely to drive Kiwi to 0.6000

After the pause and correction back above 0.7000 two weeks ago the NZD/USD exchange rate has been sold heavily in the forex markets since, due to a stronger USD globally and a surprise 0.50% cut in the OCR by the RBNZ. The Kiwi hit a 2-year low of 0.6440 last week following the RBNZ interest rate change, but has recovered somewhat to 0.6680 at the time of writing on the back of a small profit-taking rebound by the beleaguered AUD. The volatility in daily movements remains high as foreign investors pull funds out and speculators take profits by buying back at the lower levels. Standing back from the wild roller-coaster of daily swings, the overall the trend remains firmly down for the NZD against the USD. The reasons for the negative NZD outlook remain the same; lower NZ interest rates, NZ economy in recession, strong USD globally, weaker AUD and weaker commodity prices. The continuation of a lower NZD/USD trend towards 0.6000 is highly probable with the USD having turned a major corner against the Euro and other major currencies. The USD has strengthened from $1.60 against the Euro to $1.40 over recent months. Many forecasters are now predicting $1.25 next year as the Europeans are eventually forced to cut their interest rates. This only returns the USD to a mid-point position against the Euro in terms of long-term trading ranges. Another 10% appreciation of the USD to $1.25 against the Euro, places the Kiwi at 0.6000. The cross-rates against the Australian dollar, GB Pounds and Euro seem likely to remain broadly stable at current levels over coming months in this environment, as falls in these currencies against the USD are matched by NZD falls. The Japanese Yen however is a different story. The unwinding of carry-trades and investments in Uridashi bonds by Japanese currency investors / speculators has led to Yen buying against the USD, whereas all the other major currencies have weakened against the stronger USD. The Yen has moved from 110 to below 106, driving the JPY/NZD cross-rate sharply lower from 75.0 to 70.0. There was evidence of "stop-loss" selling out of NZD's against the Yen by Japanese currency margin traders once the key level of 75.0 was broken. Japanese economic figures and still miniscule Japanese interest rates do not support a stronger Yen, but for the meantime capital flows back into Japan from an uncertain investment world are helping the Yen. The sea-change in the direction and sentiment towards the USD globally has been underlined over this past week, with the troubles at US investment bank, Lehman Bros not causing any selling of the USD on world currency markets. The "verbal" intervention to support the USD by US Fed Chairman, Ben Bernanke back in June has caused a major U-turn in both oil prices and the USD exchange rate (as the statement was designed to do). Local exporters in USD's have a lot to thank "Bold Ben" for. ------------------ *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.