Tighten your seatbelts: dollar set for wild ride
After flirting with the US60c mark yesterday the New Zealand dollar has slipped back to 0.588755c and is set for a bumpy ride over the coming months, with its fate closely tied to global equity markets and the price of commodities.
BNZ currency strategist Danica Hampton believes last night’s currency moves are an indication of things to come.
With stock markets rebounding 25% from their March lows investors have trimmed back safe-haven positions in the US dollar, “which is generally weak,” and seen a fresh appetite for high-yielding currencies from Japan following the beginning of its fiscal new year, helping to drive the kiwi up.
Investor confidence however, remains fragile and it won’t take much to pop the bubble.
The first quarter Northern Hemisphere corporate earnings season is about to begin, and it will only take some negative corporate earnings and a slide in equity markets for investors to suddenly be looking at “a half empty glass again,” says Ms Hampton.
“In that sort of scenario we will see the kiwi slide.”
For these reasons and more the kiwi dollar’s rapid rise over the past couple of weeks is unlikely to be the start of a new uptrend, given that it’s currently riding an optimistic wave that is likely to be immediately followed by pessimism over the next few weeks.
BNZ’s fair value model for the New Zealand dollar has risen dramatically over the last month, largely because of the increase in New Zealand interest rates, the widening of the interest rate spreads, and rising commodity prices.
It currently has the kiwi at a fair value range of 57.5c to 59.5c, which seems appropriate, but if the dollar breaks through the US60c mark it will start to look decidedly unsustainable on the topside unless there is further upward pressure on New Zealand interest rates or a strong rally in commodity prices.
However, trying to pick the level of the currency “is kind of like standing in front of a speeding truck,” shrugs Ms Hampton.
The other factor to consider is that the New Zealand market isn’t pricing in as much easing as is likely from the Reserve Bank, so the risks in the next month or so are skewed in favour of New Zealand interest rates falling.
“So if we do see a further narrowing of interest rate spreads then that will also reduce support for the kiwi and we could well see the kiwi tumble a little bit lower. I really think in the next two or three months we’re probably going to see the currency trade choppily between a 50c and 60c range,” says Ms Hampton.
The New Zealand dollar is unlikely to fall higher or lower than that range for a sustained period.
Renewed pressure for rate cuts
Pressure is mounting for Reserve Bank governor Alan Bollard to cut the Official Cash Rate by 50 basis points at the next meeting, rather than the two 25 basis point cuts he signalled at the last meeting – particularly if the Reserve Bank of Australia cuts by 50 basis points later this afternoon.
New Zealand’s OCR of 3% is still a lot higher than interest rates around most of the rest of the world, and last week’s Reserve Bank statement expressing concern about the upward pressure on wholesale interest rates, reinforces the downside risks to the next rate cut.
Data due out from the Eurozone over the coming week is likely to see the Euro start to slide, which will in turn keep pressure on the kiwi.
European leaders seem reluctant to apply monetary and fiscal stimulus, which threatens to prolong the European recession says Ms Hampton.
"Ultimately currencies are a stock price on the country so if growth in the Eurozone is going to fall at a sharper pace than elsewhere in the world, then ultimately that will weigh on the currency.
"The Euro has been the biggest beneficiary over the last month of the US dollar weakness, and I just don’t think that reflects economic fundamentals.”