By Roger J Kerr
The Kiwi dollar enters the dicey December/January market period precariously holding above its key support level at 0.7420.
Increased volatility is often seen over this period as global FX markets are thinner and less liquid. Day-to-day NZD/USD movements are often exaggerated by the illiquid state of the markets.
In previous years the Kiwi has legged higher in the Xmas/New Year trading period as seasonal buyers of NZD’s such as the meat exporters and Fonterra transact their business.
The sentiment and direction of international currency markets is now clearly much more favourable for the USD and more negative for the beleaguered Euro. The EUR/USD rate has stabilised in the $1.30/$1.33 area over this last week, however the economic and financial news coming out of Europe is highly unlikely to prompt a wave of new Euro buying.
I expect the USD to re-commence its strengthening trend form $1.40 to $1.40 and head down to $1.25 over coming weeks as the European financial/economic position deteriorates. The Germans are rightly balking at the IMF request to up the size of sovereign bail-out funds, the pressures are real and telling on the Euro on the FX markets.
US economic data continues to improve, the next monthly non-farm payrolls number can be expected to surprise on the top side in terms of jobs increases.
The Kiwi dollar has retreated rapidly from 0.7990 to 0.7400 on a stronger USD, the S&P negative outlook, RBNZ jawboning and year-end trader book-squaring.
Over coming weeks do not be surprised to see lower hard commodity prices and thus a lower AUD value as China tightens monetary policy further.
A break below 0.7420 should open the way for further stop-loss selling to 0.7200. A decisive USD break below $1.30 against the Euro would aid that expected movement.
USD exporters should be prepared to enter collar option at 0.7200 and forwards at 0.7050 to rebuild their hedge books.
Should the Kiwi dollar stay at 0.7500 for several months and agriculture production is hit hard by a summer drought, the outlook for GDP growth in NZ in 2011 is much reduced.
The worst-case scenario of a high Kiwi and drought would result in +1.5% GDP growth instead of the current forecast of +3.5%. Let’s hope the forex markets and weather patterns do not deliver this weak result.
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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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