OPINION: The Kiwi dollar rollercoaster ride. Review of the currency market for the first half of 2015

Currency and derivatives dealer signals continuing NZ currency volatility for the second half of the year

What a year so far for currency markets. The end of the first half of 2015 will be remembered as the period when more than 20 central banks globally did whatever it takes to revive sluggish economic growth and reduce unemployment.

We saw so called “currency wars” heat up between major economies fighting for their share of global growth, and the US Federal Reserve kept interest rates at near zero and started to become more concerned about USD strength.

Meanwhile, the European Central Bank, Bank of England and Bank of Japan added mountains of liquidity, a.k.a cash, into the financial markets, which reduced the value of their currencies against each other.

Some countries even introduced negative interest rates, forcing people to not hold cash.

A weaker currency equals higher export competitiveness and import attractiveness against huge growth nations like China and India.

Locally, our own RBNZ had the highest interest rates within the OCED, although Australia was not too far behind.

Changes in monetary policy and interest rates are usually the fundamental factors that traders watch most closely on a daily basis. By understanding the short, medium and long-term factors that affect the currency market, traders can make better informed trading decisions.

So what does this all mean for New Zealanders?

The New Zealand dollar depreciated more than 12% versus the US dollar in the first six months of the year and that trend looks to continue in the near term.

The wild ride of the NZD versus the AUD kept the public fascinated with headlines of parity with our Trans-Tasman counterparts itching closer for the first time, and cheaper holidays to Australia on the cards. The local currency benefited from the Australia Reserve Bank reducing the official cash rate down to 2% to revive the economy, as the mining sector boom subsides further.

Locally the NZ economy was being referred to as a ‘rock star’ economy with strong exports, migration, 3% growth rates with low headline inflation and a construction boom in Auckland and Christchurch. The situation for our currency changed dramatically in April when our Reserve Bank, on the back of depressed dairy prices (among other things) signalled interest rate cuts.

After starting the year at 95c against the AUD, the NZD went on to reach 0.9970 twice, but the parity party was short-lived and the NZD declined to 89c by the end of June.

CMC Markets New Zealand’s client activity provides a good snapshot of which currency pairings were of trading interest in New Zealand during the first six months of 2015, and provides an indication of activity in the second half the year.

The graph shows that the NZD made the top five-traded currency pairings[1] list twice, NZD/USD ($11.66bn) and NZD/AUD ($5.8bn). The biggest interest in currency markets is commonly for the Euro against the US dollar (EUR/USD $14.05bn), as it is the most frequently traded pair in the world, meaning it is the most frequently traded pair. The Euro declined over 8% in the first half of the year and at one point was moving close to parity with the USD.

Good news for currency traders lies ahead with the second half of the year likely to be as volatile as the first half, with signs of the US Federal Reserve finally moving towards its first interest rate hike, Greece continuing to make headlines, and growth concerns from China affecting our own Kiwi dollar. As such, parity with the Australian dollar may still be on the cards for the Kiwi.

Chris Smith is the managing director of CMC Markets New Zealand. CMC is a UK-based foreign exchange and derivatives dealer. c.smith@cmcmarkets.com  @cmcmarketsANZ 

 

[1] The quotation and pricing structure of the currencies traded in the forex market: the value of a currency is determined by its comparison to another currency. The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency (source: Investopedia)