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Foreign exchange and currency blog

Forex Opinion is written by consultant economist, Anthony Byett. Anthony's knowledge stems from 16 years as economist for ASB, which included 5 years as Chief Economist. Anthony has a passion for FX, and applies that enthusiasm towards informing exporters, importers and investors of the driving forces in foreign exchange markets. Visit: fxmatters.co.nz

Australia to show us the way

It is useful to think of NZD/USD exchange rates as the product of three rates: how many AUD per NZD, how many EUR per AUD and how many USD per EUR (i.e. NZD/USD= NZD/AUD x AUD/EUR x EUR/USD). This tends to isolate (although not completely) the USD effect in the EUR/USD exchange rate and the NZD effect in the NZD/AUD rate. For example, a weak US economy and low US interest rates will tend to show as a high EUR/USD, while a weak NZ economy and low NZ interest rates will tend to show as a low NZD/AUD; as at present.

The link in the middle is the AUD/EUR, in part a measure of the relative strength of the Australian economy. The Australian economy is growing relatively better than most at present and the RBA is again considering raising the Australian cash rate. Accordingly the AUD/EUR was recently at its highest level in over 20 years (peaking around 22% above its 20-year average). It was this pressure that was primarily behind the NZD/EUR rising above 57 euro-cents in September, a ‘mere’ 14% above average. Since mid September both euro cross-rates have declined but is this the end of the AUD rally?

The core driver of the AUD/EUR is relative interest rate differentials, as captured by the difference in 2-year swap rates, in turn heavily influenced by commodity prices. As always, it is more how the differential will change as opposed to its present level: should Australian 2-year swap rates (now 5.2%) rise by 1% relative to Euro swap rates (now 1.5%) in the next 3 months then the AUD/EUR is likely to be 10% higher. Conversely a narrowing by 1% will likely result in a 10% depreciation.

At the heart of this judgement is what policy stance will the RBA and ECB adopt? It is the risk of faster than anticipated RBA tightening that appears the major risk (cash rate currently priced +0.5% to 5.0% within 12 months). Around three-quarters of Australian exports are to Asia these days and Asia is growing rapidly, resulting in high Australian export prices and strong capital investment. Australian employment growth – to which the RBA are sensitive – appears to be accelerating. This momentum could force a faster tightening than currently expected, keeping the upward pressure on the AUD/EUR and, in turn, an upward bias to the NZD/EUR.

The end result: the NZ economy may be struggling but a strengthening Australian economy will likely filter through to a stronger NZ economy eventually, and meanwhile keep upward pressure on cross-rates such as the NZD/EUR.

Fed break out the printing press again
For all the currency volatility of recent weeks, the NZD remains range-bound, pushing towards the 20-month band high against the USD and toward the low versus the AUD (and CHF). Seen from this perspective, the NZD is caught between a weakening USD and strengthening AUD. Step back even further and this dichotomous force exists while ...

US Fed back to thinking about easing
The deadlock is still not broken. The NZD/AUD at 79.8c is near midway of the 75.5 – 83.7 range of the last 18 months. The NZD/USD at 73.3c is above the midpoint of the last 12 months but remains within the 65.5 – 76.3 12-month range. Providing some upward pressure on the NZD/USD is the ...

Still range bound
The stalemate continues. The general expectation is for global and local growth ahead but there is also awareness of the risks that abound. Some of these risks come into focus this week: US corporate earnings stream through from now for the June quarter; and June quarter Chinese GDP will also be reported. Growth in both ...

RBNZ franks market rate rises
Putting aside the NZD for a moment, the following notes – in response to a query – look more generally at interest rate trends at present, and sources of information. RBNZ raises Official Cash Rate (OCR) from 2.5% p.a. to 2.75% p.a., the first tightening move since the drop in 30-Apr-09. Wholesale interest rates changed only ...

More positive tone to US data
We come around once more to the monthly US jobs data. In fact we are moving into a period where news in several places have the potential to surprise (e.g. US data, RBA meeting and data, G20 finance ministers meeting next weekend, RBNZ meeting next week) – see calendar). But first the US labour market: ...

NZD piggy-backing on AUD
The Goldilocks period continues. News of improving economies continues but it is not coming quick enough to force higher interest rates in the major economies. The result is share prices and other risky assets show a slight upward bias. And the NZD/USD does not fall. There is some monetary tightening occurring. Singapore this week revalued the ...

Potential for big move over Easter
Every now and then events come along that can significantly change markets. The US jobs report this Friday is such an event. A pivotal moment in the recovery will be when US employment increases and unemployment decreases. The US March job growth to be released Saturday morning (NZ time) – during a holiday in many ...

Chinese tightening presents another risk
At the margin, the economic data of late are on balance positive, indicating growth here and generally abroad. This is promising. The NZ GDP release Thursday is expected to fit into this category. But the risks remain unusually high. There are numerous global examples of business failures, job losses and debt refinancing problems. There are ...

Fed hike later this year will set trend
The RBNZ have confirmed their expectation of a mid-2010 rate hike. However it is the US Fed’s initial tightening that will probably determine currency trends. The Federal Open Market Committee meet this week (result Wednesday morning NZ time). It is too soon to tighten yet but that could change quickly. At the start of the ...

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