fxmatters

The global financial markets continue to walk a tight rope. The momentum favours growth and rising share prices, and hence a higher NZ dollar. However there are serious questions over whether this growth momentum can be maintained next year, especially as fiscal and monetary policies are inevitably tightened. Central banks such as the RBNZ, BOE and ECB are downplaying any potential tightening and the US Fed will probably do likewise this week. Hence the NZD/JPY, NZD/EUR and maybe NZD/USD head higher for now, caught in the global risk-buying spree.

Key events shaping the future …

1) Leading indicators continue to point to higher near-term global production, consistent with output being raised to match demand that has now stabilised (but demand not necessarily increasing much). This output recovery theme does not appear to be finished yet (see Danske Bank for overview), and hence neither has the rising share market trend probably ended; in turn suggesting further upside for currencies like the AUD.

2) This global recovery is at last showing for NZ exporters, whole milk powder prices rising by 26% at the recent Fonterra auction. Meanwhile local retail spending edged higher in July (Paymark) and the continued housing recovery in July (Barfoot) suggests more spending growth to come. These news items should be sufficient to see the NZD stay with other rising currencies such as the AUD and BRL.

3) However the NZD is likely to lag, rather than lead, the AUD higher judging by the relative interest rate shift last week: interest rates are priced to increase in both countries next year (in spite of the RBNZ’s warning of possible further easing) but Australian 90-day bank bills rates are now expected to be 1.2% higher by March (up 0.4% last week) while the equivalent NZ rate is expected to be 0.5% higher (up 0.1%). This implied rising interest rate differential is likely to see the NZD/AUD remain low in the weeks ahead.

4) Interest rate differentials also look likely to play a greater role in the major exchange rates. Higher US yields last week saw the USD/JPY rise and EUR/USD fall. While this stalled the NZD/USD rally, it also accelerated the NZD/JPY rally and NZD/EUR rallies. Rising share prices will likely see these later two trends persist.

5) Just how much US interest rates are about to rise will become clearer this week following the FOMC meeting (see Calendar). The US Fed are expected (see Bloomberg) to allow their Treasury-buying programme to end (having bought around one-third of Treasury bonds issued since late March). But they will still buy large volumes of mortgage-backed-securities through to year-end and, using other central bank as a guide, will probably still be emphasising easy conditions rather than focusing on an exit strategy (just yet).