Opinion: Why the NZD is being ignored

By Roger J Kerr It is tellingly instructive that the NZD has been unable to make any gains against the USD over recent days despite a raft of economic and market factors that normally would have projected the NZD upwards. The fact that the Kiwi has been sold down to near 0.7000 in the face of this normally positive news for the currency certainly confirms the lack of global investor and speculative interest in the currency at this time. Maybe the IMF prediction last week, in their report on the NZ economy, that the NZD is 10% to 25% over-valued is being taken a lot more seriously by offshore players than what the local commentary around this has been. These positive forces for the Kiwi over recent days that have failed to attract any significant NZD buyer action are: - Both global and local commodity prices are up strongly; the CRB global index to 279 on the higher oil prices and the local ANZ export commodity index at further records high of 224 in USD terms and 166.5 in NZD terms. - The AUD is trading higher against the USD as their interest rates are raised once again by the RBA to 4.25%. The Kiwi has failed to follow the AUD up, resulting in a sharply lower NZD/AUD cross-rate at 0.7620. The yawning interest rate gap between Australia and New Zealand is now hurting the Kiwi dollar as investors favour the higher-yielding AUD. - The Dow Jones Index is pushing up to the 11,000 mark again, however over recent weeks the Kiwi has not followed the US sharemarket, even though investors have the “risk on” sign out. The Kiwi de-coupling from the Dow Jones Index is another pointer to the much reduced international investor interest in the Kiwi. - Stronger local business confidence from the QSBO survey - well, on the seasonally adjusted numbers anyway. Again currency market players are concluding along with others that the actual activity being recorded in NZ is a long way short of the overly confident expectations. The conditions for the NZD/USD rate to trade back below 0.7000 over coming days/weeks are now much more favourable. It is still crucial to the short to medium terms outlook for a lower NZD/USD rate to the mid 0.6000’s that the USD continues its stronger trend against the Euro. Recent stronger US economic data (employment and PMI services statistics) supports the view of the Fed Reserve returning their short-term interest rates to normal later in 2010/early 2011. What also needs to happen for the Kiwi to trade down to these lower levels, is the global commodity prices to pull back and cause the AUD to fall below 0.9000 to the USD. News out of China offers the most likely source of commodity market direction in this respect. —————- * 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