A mood change emerging
The scenario of sideways-trending major currencies appears to be playing out. In the last three weeks the JPY has brushed with its late-2008 highs against the USD and EUR but has failed to push higher; the EUR/USD has remained well above its Oct-08 low. Even the GBP has now stopped falling.
A lack of clear upward or downward trend amongst the major currencies tends to dampen the likely range for the NZD cross-rates. So even though the NZD hit new recent lows against the USD, EUR and JPY last week, it requires a lot of negative local (NZ and AUS) news to push the NZD significantly lower against these three currencies. No doubt the local news will be generally negative in the weeks ahead, but equally people are already anticipating plenty of tough times to come. In short, there is a good chance we too have reached a point of inflection i.e. the NZD stops falling. Whether this is the ultimate low or not will not be known for many months but, for now, current exchange rates offer good buying levels for the NZD.
Supporting the case for at least a near-term end to the NZD decline, the US share market rallied strongly last week. For all the negative US news, the S&P500 (chart) also remains above the low point of November. Any sustained pick up in global share prices is likely to be positive for the AUD and NZD. Of note, the Brazilian Bovespa share index has risen 12% in the last couple of weeks, one indicator that there is some appetite for risk internationally.
The connection between Brazil and the NZD comes through the AUD. The AUD often moves in accord with the Brazilian real (BRL) and Brazilian share index. Last week the AUD/USD posted a 5.9% gain, although local (i.e. AUS) factors are also coming into play. The RBA delivered a 1% rate cut but they also inferred that they are coming to the end of the easing phase. The futures market shows people sharply revised upward the anticipated low point in the Australian interest rate cycle (see Futures).
In sum, much bad news has been delivered. Much of the interest rate response has also been delivered by central banks. More will come but markets could well respond strongly to any news hinting of improvement. The AUD has avoided new lows at a time of sharp RBA easing and appears to at least be heading sideways, possibly about to appreciate. A stable-to-firmer AUD suggests likewise for the NZD (except against the AUD itself).
