Opinion: Why good economic news is having no effect on the value of the NZD

By Roger J Kerr Most of the financial market, economic and business news over recent weeks has been very positive for the Kiwi dollar, namely:- - The local ANZ Commodities Index in NZ$ terms has surpassed its previous record highs. - The quarterly QSBO survey of business opinion was strong. - Fonterra’s wholemilk powder on-line auction price jumped up 21% in April. - The AUD has been strong on global FX markets, buoyed by higher interest rates and a higher CRB commodity index. - The Dow Jones Index has continued to increase to above 11,000, normally encouraging international investors and traders to buy the “risk” currencies. - The USD halted its appreciation against the Euro at $1.3500 as the Greece debt bail-out halted EUR selling in the currency markets So, given all this bullish news, why hasn’t the NZD/USD exchange rate appreciated to 0.7400 and 0.7500? It has remained stable in and around 0.7100 for several weeks now. Here is the answer. Currency markets do not just function on favourable news alone automatically sending an exchange rate to a higher level. It requires NZ$ buyers (direct investors, traders, speculators) to have confidence that the currency will be worth more in the future and they will profit from their trade. The problem with the NZ$ today, and the reason for its zero response to all the excellent news, is that there are simply no buyers interested in buying it. The global players who use to trade in and out of the Kiwi dollar are not playing here any more. The main reason is that our 90-day interest rates are now 1.80% (4.50% less 2.70%) below those of Australia and international investors have lost interest in the low interest rate Kiwi dollar in favour of the higher yielding AUD. We are right off the radar screen and unlikely to return in a hurry in my view. In the short-term the NZ dollar looks particularly vulnerable to three factors forcing it below 0.7000 again:- - The US legal action Goldman Sachs for fraud on the sub-prime mortgage CDO’s is sending world sharemarkets down, thus risk appetite from investors is sharply reduced. - India might surprise the markets again this week with further monetary policy tightening action which would be negative for commodities prices. - The AUD/USD exchange rate has again failed to hold onto gains above 0.9300 and has retuned to below 0.9200. Expect to see further AUD selling over coming days on currency market profit-taking. If the Kiwi dollars stability around 0.7100 over recent weeks is denting anyone’s enthusiasm for forecasts of lower rates to 0.6500 and below this year, take a look at the overall trend lines in the chart below of Euro-Kiwi and Uridashi bond new issuance and maturities. Going forward we will continue to see large-scale NZ$ selling each month across the FX markets as bonds mature and investors take their money out of Kiwi dollars and go to Australia or elsewhere i.e. the net issuance line will continue to be negative (net NZ$ outflow). —————- * 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