NZD in tug of war
What a tug of war currency markets are proving to be. The short of it all is that the NZD remains within recent ranges against the USD and GBP but is drifting lower against the AUD, EUR and JPY.
The key driving force remains global sharemarkets, the link to the NZD coming through the AUD. While global share indices were down again last week, the last move of the week was upward on Friday night, in spite of news that US November job loses was the largest monthly decline in 34 years. That about sums up markets at present: there is so much ‘bad’ news factored into prices that volatility is likely rather than one-way downward trends for shares, the AUD and NZD.
The same logic applies to other key factors such as oil prices (down 25% last week) and the JPY/USD (+2.9%). The blame for lower oil prices was put on weak global growth prospects but such a sharp decline also appears to be of the panic/over-shooting nature and leaves less scope for more ‘bad’ news to impact. The JPY/USD is now once again near the 90 yen level that has brought strong exchange rate intervention in the past.
With so much panic around there is always the risk that some small event could trigger another sharp NZD decline, especially against a backdrop of further RBNZ rate cuts to come (see Interest rate futures).
But conditions remain poised for a sharp rebound to the trend of the last 20 weeks (during which US S&P500 -31% and NZD/JPY -39%), even if the medium-term trend remains flat-to-downward.
Viewed another way, local interest rates are falling and the local economy is in recession but interest rates are also falling sharply elsewhere (including last week Australia -0.75%, Indonesia -0.25%, UK -1.0%, Euro-zone -0.75% and Sweden -1.75%) and recession is a global trend (including the first simultaneous US, EU and Japanese recession since WWII). Looking in from the outside, NZ is not too bad – relatively.
