It may be all doom and gloom here for the pound after the latest jobs and housing data did little to lighten the economic mood. But on the other side of the world, one currency is belting along – the New Zealand dollar. But is this the right time to hitch a ride and if so how?
The New Zealand dollar (AKA the ‘kiwi’ to a forex trader) has been storming up against a range of currencies recently. But against one in particular – the US dollar – it has gone stratospheric.
This week it hit a 30-year high against the greenback at $0.8508. That means it has never been stronger since it was freely floated in 1985. The question is: why? There are two answers.
The New Zealand economy is quietly going about its business rather well. Overshadowed at times by its bigger, brasher Aussie neighbour, New Zealand turned in a pretty respectable 0.8% of GDP growth for the quarter ending in March.
That was twice what most analysts expected (although in fairness most analysts are hopeless economic forecasters at the best of times). And that’s in spite of a horrible earthquake in February.
More importantly, growth even surprised its own central bank. Indeed, so strong was the turnout that the bank is under pressure to raise interest rates.
Meanwhile, the US dollar is under huge pressure from all directions.
First, Ben Bernanke has hinted that he might initiate yet more money printing – QE3 – in a bid to stimulate growth.
And so huge is US debt that Moody’s, the ratings agency, is to review its US rating after S&P put the US economy on “negative” just recently.
Then there was the latest jobs data – just 18,000 jobs were created in June, a small fraction of what was expected by economists.
So what to do as a spread better? Well the obvious trade would be long NZD/USD. However, with the exchange rate already at a giddy level, a better bet might be long NZD against AUD.
In Australia, house prices are down and a commodities-led economy is under pressure as prices cool off globally. Throw in a profit warning from upmarket department store David Jones (a bellwether for consumer expenditure) and you have a pretty grey picture.
So rate cuts are likely, which will further weaken the Aussie dollar. It’s well known that Aussies hate conceding ground to Kiwis, but in the currency market that’s exactly what’s on the cards!