Tony Alexander

Economic Commentaries

NZD falls away

Thursday May 23rd 2013

The Kiwi dollar has fallen to a nine month low against the greenback near 80.2 cents in response to a generalised firming of the USD driven by market speculation of a “tapering” of the Federal Reserve’s asset buying programme soon. Last night in formal testimony the Fed. Chairman gave no hint of an end to the programme, opining instead about the damage from high unemployment. But in a Q&A session later he noted that tapering would commence if the data kept moving in the right direction (toward a 6.5% unemployment rate presumably) and the Fed. believed that such good movement would continue.

Those latter comments caused a sell-off in the bond market and sharemarket, but strength in the greenback. Hence the NZD’s fall but also our sustained strength against the other currencies we track above. Thus this shows how much the NZD’s decline against the USD is really all about a unilateral movement in the greenback rather than anything much specific happening for ourselves.

Having said that, because the NZD and AUD are high beta currencies (risky assets let’s call them) we have both eased a tad against the Pound, Yen and Euro from last week’s levels.

Perhaps concerned about a profit-sapping rise in imported energy and materials costs the Japanese Economy Minister this week suggested that perhaps the fall in the Japanese Yen had gone far enough and negative effects could occur.

For the Aussie dollar the talk is all about whether the recent fall back below parity against the USD is a temporary change or the start of a decline toward some figure with an eight in front of it. Actually most talk is not so much about the direction of movement as the speed at which the AUD gets there. The generally negative views toward the AUD reflect discontent at the fiscal mismanagement of the Federal Labour government – in the words of many they have squandered the opportunity provided by the biggest resources boom in generations, spending money they do not have and – as Labour governments on both sides of the Tasman are wont to do – leaving a steaming fiscal pile for the conservatives to deal with. It happened in NZ at the change from Labour to National governments in 1990 and again in 2008.

Frankly – there are now some rather large forces in play for all of the currencies of interest to us. Volatility looks like being strong in the next few months and both importers and exporters are likely to be presented with some good hedging opportunities. And what about the overall average trend for the NZD? There is downward pressure from new strength in the greenback, and weakness in the AUD upon who’s coat-tails we usually ride. But that is it. There is upward pressure from

-NZ interest rates being raised almost certainly before rates overseas.

-NZ growth accelerating toward 4% while many other economies remain mired in debt.

-NZ commodity prices being well under-pinned by growth in China.

-NZ fiscal numbers being the envy of the world, and maybe even of Australians now.

This adds up to a far lower probability now that the NZD makes it to US 90 cents, but a good chance that we regain recently lost ground against the Pound and Euro, rise further against the Aussie dollar, and experience volatility against the Yen driven by official Japanese policy toward their currency. Hang on. These are very weird times with outright economic experiments underway in all the major economies now.



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