Archive for February 2015

The flightless bird is soaring – but history shows it will eventually fall back down to earth….

Over the last 30 years the range for the New Zealand dollar versus the Australian dollar has been about 1.05 to about 1.40, give or take a little. This very broad range has traded up and down every 5 years or so.

The recent strength of the Kiwi has pushed the relationship almost over the edge, with the Aussie being talked down relentlessly and the RBA backing that up with rate cuts, and this morning the AUD/NZD touched 1.0350, it’s all time low.

The RBNZ do not have that interest rate tool at their disposal. Recent NZ retail sales data was strong, and even though the RBNZ governor says that his dollar should be 10% lower, he will not be cutting rates any time soon, having only just shifted to a neutral policy stance a few weeks ago.

Currency values are not just about interest rates though – There is really no good reason for this AUD/NZD relationship to break down completely. Economies go up and they go down, but these two countries are inextricably linked by their geography, so although short-term factors can push currency markets to extremes, I think it is time to take a longer term view by buying AUD and selling NZD around current levels.

Denmark – The more he shouts it….. the more you doubt it !!

Why is it that Central Bankers always feel the need to talk tough, instead of just quietly getting on with their business. Lars Rohde, the Danish CB governor keeps banging on about what he’s going to do and how much money he can spend, and how negative rates can go, in order to dissuade speculators from buying the Kroner – but they still keep buying it……After all, there are not many AAA Sovereigns left in Europe.

Denmark’s foreign reserves have been rising and now stand at over 30% of it’s GDP, but don’t worry because Rohde says “we can go on for ever” and he also reminds us that “we are the only supplier of Kroner”.

The CEO of the biggest Pension fund in Denmark (ATP) said that they haven’t bothered to hedge their EUR/DKK exposures because “We have full confidence in the Central Bank’s ability to maintain the peg”

Did I mention that Lars Rohde used to be the CEO of the ATP Pension fund……

Aussie Dollar – Mr Stevens is getting his wish.

Glenn Stevens, the Governor of the RBA, has been talking his currency down for a long time now, suggesting that 75 cents is an appropriate level for the Aussie dollar. In the last few months the currency has lost almost 20% versus the greenback, and tomorrow’s interest rate decision could bring further pressure.

The China economy is contracting, their steel mills are reducing output and the price of iron ore, Australia’s largest export, has halved in the last year. Stevens hopes that a weaker AUD will improve the domestic situation. One thing that he needs to be wary of is the house price bubble that continues to inflate – Sydney property prices are up over 12% in the last year alone.

The major trendline from the lows seen in 2001 and 2008 is around 71 cents. The 61.8% retracement of the big move from 60 cents in 2008 to just above 1.10 in 2011 has been convincingly broken, so an assault on the 70 cent level looks inevitable, even if rates (which have been on hold for almost a year and a half) do stay unchanged tomorrow.