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Posted in General on Monday, June 8th, 2009 | Trackback

The RBA Governor summed up the underlying global economic situation in his speech Thursday: the initial demand-cum-inventory shock appears to be passing into a stage where production is realigning with demand; but, going forward, global demand growth is likely to be moderate, thus dampening global growth prospects.

The financial market equivalent is the US S&P500 rallying over 13 weeks from 57% below the Oct-07 peak to down a mere 40% now (graph including versus previous slumps), and the NZD/USD rallying from 19% below the 15-year average to now 4% above average (the NZ TWI is slightly below average). The financial market parallel going forward would be a flatter profile for share prices and the NZD, albeit ‘flat’ does not adequately describe the probable volatility within any trend.

Before then there still remains the issue of when will markets transition i.e. when will the global share market rally and the risky-currency appreciation stop?

There was a hint in currency and money that this point was reached last week. The reaction in the share market was more equivocal.

First, the money markets. With the worst of the global financial crisis behind, attention now turns to how to unwind the huge monetary and fiscal stimulus in place (the socalled exit strategy). Such talk last week resulted in higher anticipated interest rates in the US (graph). The prospect of tightening, even though months away, will likely be a key theme ahead of the 23/24 June FOMC meeting. And typically rising US interest rates are accompanied by a rising USD/JPY.

Second, the share markets. Share markets held up remarkably well last week in light of the higher market interest rates. Further rallies are still possible even if there is a general nervousness about the sudden turnaround, such is the massive liquidity boost in place at present.

The combination of forces – plus the relatively robust state of the Australian economy – suggests the NZD could still rally higher in the near-term (especially the NZD/EUR and NZD/JPY) but that a peak is near.