Wednesday, February 18, 2015

NZ dollar heads for parity with the Aussie | Central bankers look to the USD

The Kiwi – Aussie exchange rate has made another attempt to break down through the support that existed just below the 1.05 level since early last year. This move has a sense of purpose about it.

The situation with the currencies is a reflection of the economic contrast between the two neighbouring antipodean countries. Both of them are significant producers of globally traded commodities, and both of them have, in the past, seen China as the most important client for their produce. The Chinese market is now contracting on all fronts (Let us hope, for all our sakes, that this contraction is being well-managed by the Chinese authorities).

Important as those factors are however, the currencies just might be responding more to the global unwinding of the Carry Trade (where investors borrow in low-interest rate environments and effectively lend in jurisdiction that have higher core interest rates) than being affected by their respective economic management. This unwinding is as a result of the ending of Quantitative Easing in the US. That it is having a greater impact on the Aussie dollar than the Kiwi might be down to no more than the fact that the latter economy is so much smaller, and therefore requires less in the way of global cash movements to keep its currency high. In both cases, the fiscal and monetary authorities are very much on the ball, and have kept their economies buzzing nicely through thick and thin in the years gone by.

Central bankers look to the USD

While the person in the street in New Zealand might look on currency movements in the same way as they regard a rugby match with their neighbours (every additional cent that strengthens the Kiwi against the Aussie is as good as a try for the All Blacks against Australia), their central bank chief, Graeme Wheeler, has a different outlook. His concern is with the competitiveness of New Zealand’s exports.

While many of these do indeed go to Oz, they are also destined for other overseas markets, and yes, still to China. In these cases they are priced in US dollars. So, much as they will want to hold down the Kiwi against the Aussie, it is far more important that it is made to fall against the Greenback. The Reserve Bank of New Zealand (RBNZ) has shown in the past that it is prepared to intervene directly in the Forex markets in order to bring this about.

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