Opinion: Quarterly GDP growth over 0.8% on Thursday may boost Kiwi$

By Roger J Kerr Very low US interest rates (i.e. 0.25%) were a major factor behind the rally back upwards in global commodity prices last year, for two very good reasons:- - Pension fund managers allocated more money to “Commodities” as an investment asset class that was supposedly risk diversified from equities and offered greater return than 0% for “Cash” as an investment class. Financial players in commodity markets so far have only been buyers. - Buyers and holders of commodities had virtually no carrying costs with interest rates so low, so why wouldn’t they buy and hold more than normal levels? The debate around the world today is whether commodity prices can keep moving up in 2010 when US interest rates will inevitably increase later in the year. We saw a rally upwards in commodity prices last week (lifting the Kiwi above 0.7000 to highs of 0.7175) when the US Fed Reserve did not change their wording on the “extended period” for low US interest rates. The surprise increase in Indian interest rates over the weekend has added to the complex debate about Chinese and Indian commodity demand levels going forward if their economies are slowed down by tighter monetary policy settings. With consumer spending in the US still sluggish the global demand for commodities is all about the rate of Chinese/Indian urbanisation (demand for products made from metal, like cars and TV’s) and transport infrastructure (roads and railroads). Adding to the intrigue currently is the industrial espionage court proceedings against Rio Tinto in China, with one Australian national involved causing strained diplomatic/trade relationships between Australia and China. They both need each other, but as I have stated before any blip in China would force commodity prices down, taking the AUD and NZD down with them. Watch out for the New Zealand GDP outcome this Thursday to push the Kiwi dollar up or down. A quarterly increase above +0.8% will be positive for the Kiwi, below +0.6% negative for the currency. Outside the continuing dominating influence of the commodity prices/AUD on the NZ dollar, the interest rate outlook and USD/EUR currency outlook still point to a lower NZD/USD rate over coming weeks and months. —————- * 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