NZD/USD on way to 70c again, eventually
The seemingly schizophrenic nature of financial markets has continued into 2009. The end result are currency trends that are broadly sideways. The one thing agreed is that 2009 will be tough for all economies. But mostly the talk is a of global recession – not depression – with the massive policy response by governments expected to limit damage in terms of job losses.
Given that financial markets are largely forward-looking, this line of thinking implies a sizable rebound at some stage this year in those markets worst hit in 2008, especially equities in general and currencies such as the EUR, AUD and NZD. Conversely the USD is likely to decline (especially given that the US is at the core of global problems and at the head of the monetary response). In sum, a higher NZD/USD by year-end is likely (say 70c).
However such NZD strength will require a EUR/USD rally, and the EUR is unlikely to appreciate sustainably until such time as the worst of the ‘bad news’ in Europe has been delivered. This does not appear to be the case at present. Perversely a strong rate cut by the ECB Thursday night may bring forward expectations of this turning point and hence kick-start a sustained rally against the USD. But the hints coming from the ECB suggest conservatism – and hence a drawn out slowdown. So the ‘weak USD scenario’ may have to wait a few months yet.
In the meantime the extent of the local monetary response comes into focus once more. The RBNZ (29-Jan) and RBA (3-Feb) are expected to cut rates again, especially if inflation is reported lower than expected beforehand (see Calendar).
In sum, the NZD could well be higher by year-end but there will be plenty of volatility along the way, including probably some buying opportunties in the lead-up to the next RBNZ easing.
