Though the New Zealand dollar (‘NZD’) might not be a big hitter on the currency markets versus the big boys of the US dollar, Sterling, Yen – and accounts for 2% of global foreign exchange (‘FX’) trading – it’s nevertheless a G10 currency. But could recent ‘Kiwi’ weakness against the US dollar see it fall to 60 US cents or beyond anytime soon?
Over the past week the Kiwi dollar has declined from a tad above 67 US cents (14 July) to hover at around the 65-cents mark this Monday. Sure it’s not a massive drop in a week but the currency is at five-year lows against the Greenback. This Monday morning it was trading at US$0.6523, having closed last Friday at US$0.6517. It had been as high 77 US cents in late April this year and as high as 88 last July. That equates to a decline over the period of 26% against the US dollar.
Much of the reason for the decline can be attributed to a steep drop in dairy prices, which have fallen by some 40% since March 2015 according to industry figures from Global Dairy Trade (‘GDT’). In the case of New Zealand, the GDT Price Index auction event held on 15 July saw a dramatic -10.7% change to an average price of $2,082, which was worse than the low previous number of -5.8%.
Add to that the Consumer Price Index (‘CPI’) came in below expectations, which could see a move by the Reserve Bank of New Zealand (‘RBNZ’) to cut interest rates to stimulate the economy. Coming possibly later this week – during a RBNZ meeting on Thursday – a 0.25% cut from the current level of 3.25% – would follow last month’s cut in the Official Cash Rate (‘OCR’). So, not exactly a too rosy picture.
Richard Coupe, a foreign exchange sales trader at FX specialist boutique Foenix Partners in London, commenting says: “With a weaker CPI print (0.4% quarter on quarter vs. 0.5% expected), a July RBNZ cut is now very much on the cards with three cuts forecasted by year end, significantly reducing the carry advantage for the NZD.”
He adds: “With the recent hawkish comments from Bank of England governor Mark Carney, corporate buyers of NZD and Canadian dollars are enjoying current levels and are currently adjusting costing rates higher in line with market movements. Monetary policy adjustments from both respective countries – both now and in the near future – would suggest those corporate companies who budgeted early this calendar year are at good levels in respect to the 2015 outlook.”
Having broken a five-year low of 0.68, NZD/USD is now currently testing the next important ‘support level’ of 0.6575, which also dates back to 2010. The NZD, which floated on 4 March 1985 at the initial rate of US$0.4444, has since traded in the range of about US$0.39 to 0.88.
Kiana Danial, a New York-based FX trader, investment adviser at investdiva.com and author of ‘Guide To Making Money In Forex’ by McGraw-Hill, commenting on where the NZD might tread going forward versus the Greenback says: “A break below this level indicates the possibility of a free fall to the lows back in 2009 at 0.62.” But could it go lower still?
“0.60 would be a bit too aggressive for a fall in only one week,” Danial argues. “However, given the fact that back in 2009 we saw declines as low as 0.49…we could see the pair reaching these levels over the course of the next few months.”
She adds: “It’s highly possible that we [could] see the drop to 0.62 with the strengthening dollar, especially if a New Zealand interest rate cut happens. And, a break below 0.62 could certainly open doors for further drops towards 0.60 and lower.”
Last month, when the Reserve Bank reduced the OCR to 3.25% Bank Governor Graeme Wheeler remarked in a statement that: “With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified.”
It’s interesting to note that with regard to the US dollar on its own, the ratio of long to short positions in USD in comparison with all other currency pairs is nearly 50%. But this ratio doesn’t currently hold for NZD/USD and more retail traders are in a bullish stance rather than a bearish one on the New Zealand dollar as traded against the Greenback. And, last week Danial pointed out that “77% of traders” at one of the world’s largest brokers were shockingly “long the NZD/USD pair.”
Elsewhere, Kathy Lien, Managing Director of FX Strategy for BK Asset Management who formerly worked at JPMorgan Chase JPM +0.55% on the interbank FX trading desk, speaking on CNBC’s ‘Trading Nation’ last Friday (17 June) said that the Kiwi could possibly go to “62 or maybe even 60 [US] cents”. So, selling around the “65 handle” is a good trade, she contended. This was despite some traders believing the currency was oversold.
It’s certainly no easy task predicting where G10 currency pairs – spanning US$, Euro, Japanese Yen, Sterling as well as Canadian dollar, Chinese RMB (Yuan) and NZD – will be trading going forward.
Leading Nordic bank SEB , which published its Currency Strategy paper titled ‘A Tail Of The Taylor Rule’ on 27 May, and recommended in the G10 basket going ‘Short’ the NZD (6.1%) along with the Euro (30.6%), Swiss Franc (25.4%), Australian Dollar (23.6%) and Japanese Yen (14.3%).
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Clearly, it’s a while since this paper came out and the specific recommendations may well have been adjusted in the interim. That said, SEB’s FX forecast from late May on the NZD/USD pencilled the rate in at 0.71 for the third quarter of this year, followed by 0.69 in Q4 2015 and 0.68 in Q1 2016. The consensus on the currency pair based on Bloomberg FX survey forecasts at the time was 0.72 for Q1 and Q2 2016. That looks challenging given the present environment.
It’s likely to be a bit rocky road for the New Zealand dollar over the next couple of months. But there would have to be some major further deterioration on the economic front down under before the currency plumbed sub-60 US cents. And, the low of just below 50 from March 2009 is a very distant memory. But watch this space.
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Over the past week the Kiwi dollar has declined from a […]