fxmatters

Waves of anxiety are driving financial markets at present. This has little to do with rational analysis (but then the same could be said when waves of optimism were the driving force in earlier years). Each wave of fear at present produces falling share prices, lower commodity prices and, leading the currency charge, a lower AUD. The net effect was another sharp NZD fall last week, except against the AUD (the NZD/AUD rising 8% Saturday to Saturday to over 92c before slipping this morning).

Quite staggering, the NZD/USD has depreciated 22% since 18-July, and the NZD/JPY 26%. The NZD/AUD increased 18%.

At times like this it is important to resist the urge to foresee the future in black and white terms. There are undoubtedly parallels with history but there are many things that are also different. It is prudent to think in terms of global recession or maybe a couple of quick recessionary bouts but a repeat of the depression years still appears only a remote prospect. Credit growth and general asset price appreciation will be much less in the next 5-10 years but rising incomes will likely still produce an upward bias to both in the medium term. Australia in particular appears well placed to weather any global recession and hence insulate New Zealand to a large extent. These thoughts suggest a strategy of tentative equity buying.

As regards currency, the NZ dollar is now close to the long-term average on a TWI basis. History has shown it could be significantly higher or lower in a couple of years time and one should not be too confident about a view in either direction. In the meantime, further waves of fear could emerge and drive the AUD and NZD lower. But there is also the strong prospect of a sharp rebound soon. Picking the timing of these events is nigh on impossible so a strategy of exporters accumulating NZDs over the next few days and weeks, and having orders in below current levels appears prudent. Importers are more awkwardly placed as the NZD has already dropped a long way – except, that is, against the AUD where a similar strategy of selling NZD/AUD now and having orders above 90c appeals as a strategy.

The key message: have a strategy; it is not time to be whimsical.

(PS my apologies to those who received an old posting by email on Friday. A problem with the host server resulted in the website reverting to a backup copy and in the process the old email was triggered).