fxmatters

The period of USD weakness proved brief and ended last week with devastating effect: a 5.8% EUR/USD fall (i.e. USD rise), and many double-digit commodity price falls including oil down 12%. The likelihood of slow global growth is increasing with each bout of banking difficulty. The net effect was a lower NZD against the USD and JPY (and most Asian currencies) but a higher NZD against most European currencies and against the AUD.

It is these later moves that appear the anomalies. Confidence has ticked up in NZ following the RBNZ easings of July and September – as likely to be released this week – but the global meltdown will impact here, and will also drive local interest rates even lower. In the meanwhile the global turmoil has added 1.25% p.a. to NZ banks’ short-term funding costs offshore in the last 4 weeks, and has dried up funding for some non-banks. The RBNZ will be even keener now to ease again soon.

These local factors imply a downward trending NZD in the next few months, and probably in the days ahead of the 23 October OCR Review. The offshore factors will add volatility. The week ahead is likely to be relatively calm compared with the extreme volatility of last week with probably some reversal of the major moves of last week.