fxmatters

It has been a mixed week, the NZ TWI being much the same now as last Sunday. Hence the jury is still out on whether, after the quick rebound of March, the NZD and AUD are now trending higher or whether they remain within a broad, sideways trend (with the next move likely downwards).

The latter still appears more likely. Especially in light of the IMF sobering reports – more US loan write-downs to come, a speedy global growth pick-up is unlikely, risks remain of problems feeding back to reduce output further – and a US report tracking previous US share market rallies and showing an approximate 50/50 record of revisiting previous lows even when the overall trend is upward. In other words, sentiment will probably wax and wane about prospects for global growth and asset prices; in turn, suggesting choppy currency markets.

It is quite possible that this week is not any more enlightening (see Calendar). The local RBNZ review will provide a rate cut and a warning that rates will remain low for a long time but the RBNZ will probably be guarded until the fiscal stance is clearer. The Fed meeting is likely to have an even more general wait-and-see tone. Confirmation of a turning point in confidence is likely to show in NZ, Australian and US surveys but this story is now well known so reaction may be muted.

The real action may come the following week when the results of the US banks’ stress tests are released and when we get to see how far the ECB is prepared to ease monetary policy using a wider set of instruments.

After a period of conflicting pressures, the stars appear more aligned at present; namely pointing to downward for the NZ dollar.

1) There is the RBNZ policy review next week. The market is pricing midway between a 0.25% and 0.50% rate cut. This pricing between now and the 30th is likely to err more towards a 0.5% rate cut – one drag on the NZD near-term, especially for the NZD/AUD.

2) There is likely to be focus in the lead-up to the 28-May Budget on difficulties faced by NZ. These were highlighted last week in the OECD NZ Economic Survey:

“… among the most indebted in the OECD”

“Although the quality of New Zealand’s regulatory regime is generally high,
it has fallen relative to other OECD countries”

The conflicting threats of credit rating downgrade should the government spend too much, and further monetary easing should the government restrain spending too much are likely weigh on the NZD.

3) The RBA and Australian government have a similar interplay ahead, with a budget 12-May and RBA reviews 5-May and 2-Jun. The net effect will be focus on an Australian recession and another RBA easing; a drag on the AUD (and hence on the NZD/USD).

4) The ECB is also likely to cut interest rates again 7-May, including presenting a quantitative easing policy. This is likely to weigh on the EUR (and hence on the AUD/USD and NZD/USD).

5) More significant than all the above, the global ‘green shoots’ optimism will have been sorely dented by sharp share price falls last night. Further forecasts and news to come of recession and the 4-May US banks’ stress test results will likely provide a further check to recent optimism.

This is not to say that the global recovery story and an upward trending NZD need not be a key theme of 2009. They most likely will be but now does not appear to be the right time. Importers may wish to guard against a sharp NZD fall in the next month. Exporters would do well to look for buying opportunities – a NZD/USD around 53-54c appears a reasonable starting point.

The local economy and global expectations are now providing opposing forces on the NZ dollar; the downward pressure from local forces is likely to persist until the RBNZ policy announcement 30-Apr; the direction of offshore pressures is uncertain. The most likely outcome is a lower NZD/AUD.

Take the local forces first. The NZIER survey showed the NZ economy as still entrenched in recession. Likewise Paymark electronic sales figures showed household spending slipping a notch in March. The result will be another RBNZ cash rate cut on 30-Apr, irrespective of whether the annual inflation rate is revealed to be 3% Friday or not (see Westpac preview). Economists’ cash rate predictions are centred on -0.5% while the market is still pricing closer to -0.25%; the debate in the lead-up would typically push the NZD lower.

The two key international currency trends at present are less clear. The EUR/USD appears to be in broad sideways pattern, with the next move likely to be the EUR weakening into the 7-May ECB decision; this would provide some downward pressure on the NZD/USD. But the upward trend in risky assets remains intact: the US share market rallied for the fifth consecutive week; ‘risky’ currencies have appreciated quickly with the NZD, KRW and ZAR to the fore (each up 16% in 5 weeks vs. USD). It is how this last trend unfolds that will probably dictate where the NZD goes in the next few weeks.

Unfortunately the trend is uncertain: we can point to momentum last week, significantly the AUD/EUR moving above its range of recent months; but any signs of global recovery are tentative and negative shocks could occur at any stage to derail the rally.

Stepping back, the general opinion appears to be that global recovery will not come quickly (see OECD forecasts), and that there will be challenges addressing the spin-off and also unwinding the massive monetary and fiscal stimili (see recent talk of New Zealander Graeme Wheeler, Managing Director Operations at the World Bank).

The impression gained is one of many false dawns to come for economies and asset markets alike. The current global ‘risk’ rally is likely to be such a false dawn. But that need not prevent a sharp short-covering AUD-led rally near-term.

In sum, the NZD is near or above 2009 highs for many cross-rates. The mixed global forces make the near-term direction unclear; sharp movements either way are possible. The imminent RBNZ rate cut is likely to show as a weaker NZD/AUD.

It seems there are a queue of people now explicitly or implicitly predicting a stronger NZD and AUD: (futures traders are betting on higher AUD, JPMorgan is pick higher commodity currencies and Goldman say buy emerging country currencies. All are of the same theme, namely that we are in a period now of a general shift to risk.

Last week that shift resulted in the exchange rate rises versus the USD for the Polish Zloty (+6.8%), South African Rand (+6.1%) and Mexican Peso (+5.9%), to name a few; showing the NZD (+2.8%) to have been modest.

The big test is likely to come in the form of March quarter earnings reported by corporates over the next few weeks, as more generally ‘risk’ is still tied to the US share market. Reports start with Alcoa this week and GE and Citigroup next week. Given people are on balance seeing things through rosey glasses at present, the risk bias is likely to be that earnings disappoint but just when and why is a guessing game.

Closer to home the RBA policy decision Tuesday afternoon provides further potential to push the AUD (and hence NZD) higher. It would be a major surprise if the RBA did not indicate same cause for a pause in monetary easing; once this announcement is out of the way (maybe with a 0.25% rate cut as an insurance move), the AUD is likely to drift higher.

In all, there is an upward bias to the NZD at present coming through from international forces. Another touch of 60 US cents is very possible. A move even higher is possible – indeed likely at some stage this year – but there remains plenty of opportunity for the nascent global optimism to falter.