Opinion: Kiwi rollercoaster gets the speed-wobbles

The New Zealand dollar exchange rate is badly in need of a breather - a consolidation period is desperately required at around the 0.7000 level following the rapid depreciation of recent weeks. The fall has been a little too far, too fast in almost free-fall market conditions. The relatively small and illiquid nature of the NZD forex market is all too apparent in such an environment. Overseas currency traders and investors do tend to all rush the Kiwi exit door at once, forgetting the limited market size - the result being some carnage along the way when it gets into such elevator shaft declines. The sharp rebound upwards to 0.7100 from lows of 0.6830 (intra-day) on 13 August is not too unexpected or unusual. Profit-taking by currency speculators, who short-sold the NZ dollar earlier, was always likely at some stage given the extent of the move down. The question for the medium term direction of the Kiwi is whether this short-term buying is temporary or permanent? There is no evidence form the forex marketplace that the buying is related to permanent capital inflows into New Zealand. There have been no positive economic developments here to cause permanent buying of the currency. Only about 50% of the maturing eurokiwi and uridashi bonds in the month of August have been reinvested into new issues. Foreign investors of all sorts of shapes and sizes have been frightened-off New Zealand and the Kiwi dollar with headlines of monetary loosening and economic recession. The economic news is not about to suddenly improve anytime soon either! However most of the negative news on the NZ economy that the FX market has absorbed over recent months has largely now been priced-in to the exchange rate at 0.7000. Further permanent falls in the NZD against the USD to the mid and low-0.6000’s will need to come from a stronger USD globally. Despite this general view, two upcoming local events may stimulate additional NZD selling on the day, namely the RBNZ Monetary Policy Statement on 11 September and GDP growth figures for the June quarter on 26 September. Both statements will be sobering reminders of the economic recession that we are in and that there is no easy or quick way back to stronger growth path. ------------------ *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.