fxmatters

It appears we have passed many of the hurdles put in front of the NZ dollar rally with flying colours: the RBNZ rate cut was aggressive but in this mood of recovery anticipation it was taken to increase the chances of local growth; the RBA did not ease and this time the fact that they did not need to act was taken as evidence of imminent Australian recovery; the NZ unemployment rate did rise to 5% in the March quarter but this is hardly evidence of widespread job losses (and meanwhile NZ wages are still increasing!); the US bank test results have been delayed until tonight but the leaked results and bank share prices rallies suggest some comfort with results already known to the banks, and anyway Warren Buffett thinks Wells Fargo a great buy irrespective of what some bureaucrats think.

The coming hurdles of the RBA Statement and Australian budget appear modest against this background. Likewise the NZ Budget later in the month, especially given the hints that the Treasurer is working hard to avert a budget blowout and hence a credit rating downgrade.

The remaining key risks are the Australian employment figures this afternoon and the ECB announcement tonight. For all the local currency strength, the larger picture remains of a broad sideways pattern amongst the major currencies. The ECB comments tonight have the potential to drag the euro lower, and hence dampen the extent that the NZD and AUD rally against the USD.

But it does appear that the ‘green shoots’ scenario has taken hold and risk is back in favour. Currencies such as the NZD and AUD continue to be grouped with shares as a ‘risky’ asset class. The general trend for each is upward under an imminent global recovery, the AUD more so because, as RBA Governor Stevens said recently, “There are rather few countries that have the potential to offer so attractive a proposition to international capital” [as Australia].

However the evidence for a imminent global recovery is tentative. There are also many yellow shoots as discussed by New York Professor Roubini, who warns that a US recession may not end until 2010.

This suggests a tentative approach to currency trading as well. Work with the upward NZD for now. Expect an upward NZD trend over the next twelve months. But also expect some very choppy movements along the way. Right now the upside potential appears to be greatest for the NZD/EUR and least for the NZD/AUD.