NZ currency riding on risk takers' fancy
Exporter Magazine, Issue 11, June, 2009
Bob Eldin, June 2009
A greater appetite for risk tolerance – essentially – explains the NZ dollar’s recent strengthening. It has rallied 18% on a trade weighted index basis in the past three months after falling 32% in just over a year. Against the US dollar it has rallied 28% from its lows, after falling 40%. “When investors overseas feel confident, they buy growth and risky assets, like shares and the NZ dollar,” BNZ chief economist Tony Alexander explains. “When they are worried, they sell growth assets and the kiwi dollar - that’s why the kiwi dollar tends to move with the likes of the US share market.”
REGAINING LOST GROUND
The NZD has recovered some ground in line with gains in the US sharemarket since the second week in March. The US currency has weakened at the same time as investors have moved from it as a safe haven currency. If the global economy sours again, and sharemarkets fall, the NZD would drop back below US50c – “we don’t think that’s going to happen, but it’s a vulnerability,” says Alexander. HiFX’s Mike Hollows says currency
forecasting is akin to fortune telling, but he expects the NZ dollar to test US65c within the next month or two and maybe push higher, especially if the US dollar continues to weaken against its major trading partners.
EXPECTATIONS
Here’s what some market analysts expect the kiwi to do:
• The NZD/AUD looks set to continue bouncing between AUD77c – 82.50c (77.00 represents an important 20-year trend line).
• Against the Japanese yen, the NZ dollar recently returned above 60 yen and looks on course to test 65 yen.
• Against the euro, the NZ dollar is expected to range between .4250 -.4750 to the euro but with an upward bias.
• Against the sterling, the NZ dollar looks range bound but with an upward bias. HiFX expects it to test .4025 and possibly .4150 over thenext few months.
Hollows is concerned about the NZD trade weighted index, which looks to have broken up out of its recent confined ranges and looks poised to track higher. Deutsche Bank chief economist Darren Gibbs doubts the currency will retain its new-gained strength, although in the very near term it probably will go higher before depreciating. “But we’re not as bearish on the currency as many of the other banks - we are saying itcould be around 55c 56c.” Westpac chief economist Brendan O’Donovan says any forecast should come with a health warning. He can make a case for the currency further appreciating, and a case just asconvincing for it to depreciate.
WHY THE KIWI WILL GO HIGHER:
Our banking system is healthy, relative to many others;
• NZ’s GDP growth has been hurt less than many of our trading partners;
• Continued growth in the world economy points to a stronger NZD;
• Investors’ risk appetite has been heightened by signs of the massive decline in the global economy being arrested;
• Each improvement in US economic data has tended to be bad for the US dollar (it is seen as better for the rest of the world, reinforcing investors’ willingness to take on more risk and buy commodity currencies and the like);
• Commodity prices have improved and equity markets have rallied.
WHY THE KIWI WILL BE WEAKER:
• The world is shunning debt and NZ is one of the most indebted countries in the world;
• The bout of increased risk appetite won’t last – during its lost decade, Japan had four periods of strong equity market rallies but all unwound. Similarly, after the Great Depression, the US had about seven episodes of strong rallies in equity markets lasting an average of 40 days before unwinding.