fxmatters

Almost 12 months ago to the day The Economist warned “we will see asset classes that will have very good runs (commodities, high-yield debt, currencies like the New Zealand dollar) only to lose a good deal of those gains in a short period”, the result of hedge fund activity. They were right. The goings-on of recent weeks appears very much in the category of speculators unwinding positions, especially in commodities and the AUD. Add to that list the EUR. The NZD has simply been dragged along for the ride with the telling statistic being the NZD/AUD being much the same now as 7 weeks ago when this phase started.

Meanwhile the common phrase being bandied about by central bankers is heightened uncertainty. They also are right.

So what will the RBNZ do Thursday against this backdrop? The conservative approach would be to follow through with the 0.25% rate cut now expected by the market. The greater risk is that the RBNZ take a more aggressive stance and cut by 0.5%. This suggests potential for currency weakness going into Thursday (at least against the AUD) but possibly a NZD rebound afterward if the RBNZ do take the conservative approach.

However it may be global forces that dominate. The huge global shift in currencies is not matched by compelling economic fundamentals. The ECB appear on hold and are talking gradual recovery. The US banks and economy are still in difficulty. The Australian growth outlook remains better than most. It all has the makings of a sharp rebound when the panic stage passes.

This will not take away the downward trend that the NZD is now on. But, as usual, there will be plenty of choppiness along the way.