The NZD remains caught up in global forces. Last week the NZD generally weakened, falling against 30 of 38 monitored currencies but it was the gain against the weakening USD (and GBP) that received most attention. Over 4 weeks the NZD has appreciated against 34 of these currencies with one of the exceptions being the AUD. In other words, the RBNZ has not managed to disentangle the NZD from the weak USD on the one hand and the strong AUD on the other. There is the possibility that the release of NZ June quarter GDP Thursday (see Calendar) may shake the NZD free a little but more likely the fate of the NZD will rest with the major global trends.
Here the key tension is mounting evidence of global improvement and a reticence by central banks to respond for fear of derailing the nascent recovery. This is creating an abundance of US dollars and a goldilocks period for risky assets, especially when priced in USD. This period cannot last and the question is when the (relatively) little bubble is pricked. Ten years ago the answer was more likely later rather than sooner, the attitude being any remaining problems can be patched up afterwards. The recent experience of the financial crisis suggests central bankers should not allow bubble-like conditions to persist. Already there is tightening occurring outside the largest economies Bloomberg.
One example of the imbalances that the current policy settings cause is the Chinese yuan. It could be argued that a weaker USD is appropriate given global conditions but the USD is not just the USD – it is also the Chinese yuan (and the Hong Kong dollar) as the yuan is very closely linked to the USD at present. The end result is the EUR/CNY has now moved above the long-run average and there will be increasing calls within Europe for either a lower EUR or a higher CNY.
It is unlikely that the meeting of G20 leaders Thursday/Friday will provide a reaction plan, nor the US Fed meeting Wednesday (Thur 6:15am NZ time). But market players will increasingly focus on exit strategies (i.e. tighter monetary policy) in the next few weeks.
In terms of the NZD/USD, the momentum remains upward but the risk of a sharp turnaround is high.
Tags: Anthony Byett, Foreign Exchange
