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The standout feature of global currency markets over recent weeks has been the increase in geo-political tensions surrounding Syria and North Korea, resulting in a general “flight to safety and safe haven” assets by investors. The Japanese Yen always strengthens in these conditions and on cue it has shifted from 114.00 against the US dollar to below 109.00 as Japanese investors repatriate funds home (buying Yen to do so). Another sign of safe haven flows is the weight of money coming into US Treasury Bonds, the 10-year yield being forced down from 2.40% to 2.25% over the last three weeks. The international sabre-rattling and brinkmanship coming from the new Trump administration on the geo-political stage is not totally surprising, however it is another example of a pre-election pledge of the US not being the world’s policeman being totally contradicted. The inability of the North Korean regime to follow through on their threats is likely to result in the current geo-political risks and uncertainties reducing in intensity over coming weeks. Therefore, an unwinding of the current Yen and US Treasury Bond strength is more likely than continued gains. The Japanese Yen/NZ dollar cross-rate at 76.20 offers excellent long-term hedging opportunities for local Yen exporters, as outside the short-term safe haven investment flows there is no economic justification for the Yen to be stronger against the US dollar. A return of the JPY/USD rate to 114.00, crossed with a 0.7100 NZD/USD exchange rate would have the JPY/NZD cross-rate back above 80.00.
Over our history, successive European and US leaders have failed to find peaceful or political solutions to the ongoing troubles and injustices in the Middle East and Afghanistan. The current bunch will not have the answers either. Over coming weeks the worries that financial and investment markets have displayed about global geo-political risks should subside and the focus of attention will return to underlying economics and relative values. Against this scenario, the New Zealand dollar does not stand out as a currency that will draw attention to be actively purchased or sold by offshore hedge funds and/or currency speculators. Whilst general investment and financial markets have become more volatile as geo-political tensions increase, and the unpredictable and aggressive behaviour of US President Donald Trump adds to the mix, the NZ dollar has held its own and remained in the tight 0.6900 to 0.7100 trading range since the start of March. It is instructive as to the much reduced international interest to play in the Kiwi dollar that the NZ dollar has not been sold lower over a time when the VIX market volatility index has shot up on these global tensions. Typically, the historical correlation of the Kiwi dollar to the VIX index would have seen a much lower NZ exchange rate. The NZD/USD rate has bounced off the support line of 0.6900 on three separate occasions over the last six weeks, indicating the Kiwi’s stability and resilience that this column had expected through this period.
A number of factors point to the NZD/USD rate remaining comfortably above 0.7000 over coming weeks and months:-
Despite the abovementioned positives and a still high-performing NZ economy, there is not a strong argument for the Kiwi dollar to appreciate back to 0.7400/0.7500 against the USD at this time. The US dollar itself is highly unlikely to weaken against the major currencies when the US is increasing interest rates and the rest of the world is not. A stable to stronger USD against the Euro, Pound and Yen over coming months will cap and limit NZD gains to around the 0.7200 mark. The NZD/AUD cross-rate should hold in the 0.9200 to 0.9300 range as the two currencies move in tandem against the US dollar and the respective Aussie and NZ commodity prices no longer diverge in direction.