fxmatters

The danger is we see what we want to see. That particularly appears to be the case at present. The NZD/USD remains entwined with global share markets and global risk trades in general. To unravel the mystery of where the NZD/USD goes next thus requires trawling through global forces. What you find amongst the various commentators are strong reasons why, say, the US share market will continue higher and others with strong reasons why it will fall. Unfortunately the evidence in support of each case is selective, typical of the confirmation bias we often display; we tend to notice information in support of our view and ignore the opposite.

The reality is the share market and the NZD/USD could go either way near-term. The rush into high-beta US stocks appears to be over but that still leaves the global output and earnings momentum to push share prices higher. Likewise the slow US commitment to exit strategies favours more upside. Then there is the bias towards higher share prices in December to take into account (S&P500 up 16 of 20 years).

But exit strategies will become more prominent. The global fiscal and monetary tightening will temper enthusiasm for risk – and hence the NZ dollar. Exchange rate choppiness is likely to result.

For now, hedging against a higher NZD/USD remains prudent. But also factor into any strategy the strong likelihood of a lower NZD/USD within the next six months.

The mixed nature of forces will probably also show in different directions for cross-rates. It is time to start thinking about the possibility of a weaker NZD/GBP but a stronger NZD/AUD.

The global unwind of the policy stimulus is underway. Japan signaled an end to their (modest) quantitative easing last week and Norway raised their interest rates. We get to learn where US, Eurozone and UK central banks are at this week, and just how aggressive the RBA intends to be. A 0.25% rate hike by the RBA is likely but the others are more likely to forewarn of tightening rather than act now.

Markets have already signaled their unease with the stimulus unwind, the S&P500 down 4% last week being noteworthy. No doubt there will remain some too-ing and fro-ing as people balance the conflicting forces of economic recovery and stimulus removal but it does appear we have moved beyond the goldilocks period. The new stage need not necessarily bring a downward bias to share prices and the NZD but it is likely to involve more downward moves than has been apparent for several months.