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.