NZ Dollar not half way to the bottom yet
[This is another carry trade blowup of course.
Hedge funds plowed and plowed and plowed into the NZ$ and NZ govt bonds because of high interest rates.
That trade is now being unwound.
When the unwinding is done, NZ govt bonds will likely look very attractive.
Mish]
28.03.06
By Adam Bennett
The dollar hit a nearly two-year low yesterday on the back of more poor economic news, with at least one commentator predicting the kiwi is not yet half way to the bottom of the currency cycle.
Yesterday's news of another chunky trade deficit last month saw the dollar extend the losses it suffered after Friday's GDP data showed the economy was at a standstill during the December quarter.
The kiwi touched a 22-month low of US60.55c before clambering to a US60.91c close.
"The data has unfolded clearly weaker than would have been expected going into the year," said Deutsche Bank's Sydney currency strategist John Horner. "That's seen the rate support that the dollar had been enjoying dissipate to the point where a downtrend is firmly in place.
"The price action is telling us that the [interest] rate support is no longer sufficient given the size of New Zealand's external imbalances and slowing economy."
Mark Brighouse, chief investment officer of fund manager Arcus, believed fair value for the kiwi was in the region of US55c and the currency would fall well below that.
"It can easily deviate from fair value by 30 per cent," said Brighouse, one of the first commentators to call the kiwi's peak last year.
"It's done it on the upside and volatility is often a symmetrical thing. You have to accept that it could deviate by 30 per cent in the other direction."
Such a deviation would see the kiwi drop below US40c, which it did in 2000.
Brighouse said the kiwi's volatility, and therefore potential to deviate from fair value, had been increased since the currency's last cycle by the far larger involvement of hedge funds in the market. Their activity often fed off and served to amplify currency movements.
"Everything points to greater volatility rather than less," he said.
ANZ believed fair value for the kiwi was around US60c but the currency would overshoot that and bottom out at around US53c next year.
In the shorter-term, ANZ analysts believed the kiwi had been oversold of late and "a bounce should be around the corner".
Horner expected the kiwi to find some support around US59c in coming days.
Similarly, Westpac currency analysts expected the kiwi to test the US60c level this week.
"However we remain cautious as to the market's appetite to sell the dollar beyond this," they said.
nzherald.co.nz |
