By Roger J Kerr
“Risk” is being rapidly taken off the table again as global investors adjust their appetite to a very jittery and ever changing word economic and financial market environment.
The New Zealand dollar also suffers when international investors are reducing the level of their investment and market positions in the risky currencies and commodities.
The Kiwi dollar was sold down heavily in overnight foreign exchange markets on Friday 4 June following a disappointing US employment number and reports of debt problems in Hungary.
The Kiwi dollar tumbling from 0.6840 to below 0.6650, as it followed the Australian dollar and Euro lower against the USD. Investors reacted adversely to the prospect of the southern European sovereign debt problems spreading to eastern European economies.
The global infuences
The fundamentals of the Hungarian economy are far superior to those of Greece, however the Euro currency is an easy proxy asset to sell when such negative economic news hits the markets.
The Euro exchange rate against the USD is now trading below $1.2000, to new four-year lows of $1.1900. The NZD/USD exchange rate correlation remains high against the EUR/USD movements.
Having rebounded from lows of 0.8100 three weeks ago at the height of commodity and sharemarkets being sold off, the AUD had recovered reasonably confidently to 0.8500. Those AUD gains have been given back, as commodity prices have fallen away again.
The CRB Index of the major commodity prices (including oil) has reversed direction to back below 250, dragging the big commodity currency, the Aussie dollar, with it.
Yet again the Kiwi has not been sold off as far as the AUD as the level of foreign participation in our market is smaller and there are fewer long position holders to exit. As a consequence, the NZD/AUD cross-rate has lifted from 0.8050 to 0.8150.
While global investors and traders are fearful of the stability of financial and investment markets, the Kiwi dollar can be expected to be maintained under downward pressure over coming weeks. The “growth” and “commodity” currencies quickly fall out of favour when risk levels are being reduced in the major financial trading centres.
The local influences
Local economic news and upcoming adjustments to monetary policy settings are not having much influence on the value of the NZ dollar currently.
These factors are unlikely to determine the value going forward over coming months either, as nearly all the daily movements in the currency are occurring in offshore trading times, not during the trading day in New Zealand.
The news that Fonterra was forecasting another increased milksolids payout to dairy farmers of somewhere between $7 and $8 per kilo for next year, was not enough to attract net new NZ dollar buyers.
While the additional funds coming into the NZ economy increases rural incomes, many concluded that most dairy farmers would be using the extra cash to reduce additional debt levels they had taken on in recent years, rather than increasing consumer spending.
However, it does need to be recognised that our export commodity prices are at record high levels and this is always a positive forward indicator to stronger GDP growth in the NZ economy.
The high terms of trade and annual exports now exceeding annual imports are excellent measures of New Zealand’s rapidly improving economic fundamentals.
Credit rating agency, Standard & Poor’s recognised the improving situation last week in indicating that New Zealand’s sovereign rating outlook was “stable’ and not about to change from that anytime soon. Following the incredibly strong employment figures a month ago for the March quarter, there will be anticipation that the March quarter GDP growth number will be above the +0.6% consensus forecast when it is released later this month.
The RBNZ are widely expected to increase the OCR by 0.25% to 2.75% this Thursday.
However, if global investment and financial markets remain volatile all week after the Hungarian scare, it would be understandable that the RBNZ hold fire for the meantime.
The markets will be more focussed on just how the RBNZ intend to negotiate their way through the rest of 2010 and 2011, with the headline annual inflation rate climbing steeply to 5.00% due to all the GST and ETS related one-off price increases. Changes to interest rates are not a dominant driver of the near-term NZD value as the two and three year term interest rates have already fully built-in the expected OCR and 90-day rate increases over the next nine months.
The NZD movement scenario with the highest probability over the next 12 months still has to be lower to the mid to low 0.6000’s in the short-term due to the global market turmoil and falling hard commodity prices, and then a steady recovery back up again for the Kiwi as the higher interest rates and 4% GDP growth in 2011 underpin a higher currency value.
All this assumes general stability in the EUR and USD currency values in the $1.1500 to $1.2000 region. It will not be possible for the Kiwi to appreciate back up to 0.7000 again unless the Euro strengthens/USD weakens. Given the current economic performance of Europe, that seems unlikely to happen over the next year.
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* 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
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