Despite the media’s ongoing focus on Greece the biggest external drivers for the NZ dollar going forward will be developments in China, Australia and the US. Recent weakness in the Chinese stock market has been concerning but after rallying over 100% since November last year it is no surprise to see a significant correction in an overheated market. Dairy prices have declined 50% since peaking in 2014 and are expected to remain sluggish through the rest of the year.
There is no doubt the so-called commodity super-cycle which started in the early 2000’s has come to an end. It will be interesting to see how the New Zealand and Australian economies adjust and while the weaker exchange rate is offsetting some of the weakness in commodity prices other export sectors will need to step up.
The US is expected to start hiking interest rates for the first time since 2006 in September. The US economy has been slowly improving and continues to show ongoing resilience which will continue to support the US Dollar.
Major currency pairs at a quick glance:
- NZD/AUD started the year around 0.95 and after peaking at all time post float highs around 0.9970 in April, weakened by over 10% through May to finish June around 0.88 and has recently stabilised around 0.90.
- NZD/USD started the year around 0.78 and has weakened by 15% year to date to 5 year lows around 0.6620. In the middle of 2014 the NZD/USD was trading close to all time highs over 0.88 and despite losing almost 25% since then the NZD remains in a downtrend with further weakness expected over the year ahead.
- NZD/GBP started the year around 0.51 and has recently traded as low as 0.4250 to mark a decline of 16% year to date. The UK economy has shown ongoing signs of improvement over recent months which is expected to continue in contrast to a weaker NZ economic backdrop.
- NZD/EUR starting the year around 0.64 before trading to all time highs around 0.72 before falling almost 17% over the last 2 months. While recent weakness is somewhat counter intuitive considering ongoing issues in the EU and Greece the NZD has fallen out of favour with global investors as dairy prices and interest rates turn the corner.
While the fundamental backdrop for the NZD has deteriorated over the first half of 2015 and the outlook suggests further weakness over coming months, FX markets can be extremely volatile as market positioning and investor flows trump fundamental dynamics in the short to medium term. In this environment it’s not uncommon to see a 10% move with little to no fundamental reason, so timing is everything when it comes to managing your currency exposure.
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Dan Bell is the Director of FX Sales at Currency Online, a subsidiary of leading global payments provider HiFX.