The kiwi and aussie are the best performing currencies in the G10 basket against the US dollar this week, despite an almost complete lack of NZ and Australian economic data or events. So, what’s driving the market to load up on what was an almost toxic currency only last week?
The turmoil in Europe, centred around the threat of Greek defaulting on its debts, is driving investors towards the still high yielding aussie and kiwi. While both of Asia’s main commodity currencies have central banks looking to erode their attractiveness by loosening momentary policy, they are both still attractive to yield seekers. The official cash rates of NZ and Australia stand at 3.25% and 2% respectively as most other developed countries hover at or near 0%.
This drive away from European countries doesn’t only affect the aussie and kiwi, but their attractive yield status makes them an obvious target. It’s worth noting that both the kiwi and aussie are historically risky currencies, so they don’t seem the obvious choice for money flowing from European currencies, but investors are running out of options. The US dollar, yen and CAD are all benefiting from the slow push away from European currencies, but they don’t look as attractive from a yield perspective.
The RBA and RBNZ don’t want a stronger currency
Ironically, this increases the chance that the RBNZ and RBA will erode that yield attractiveness. Neither central bank wants a strong currency, in truth their members spend a lot of time attempting to do the exact opposite. Earlier this morning the RBNZ released a statement saying that the NZ dollar persists at an unjustifiable level, which may even been an attempt by the central bank to deter more yielder seekers from the kiwi.
NZ and Australia are both export based economies, and strong currencies can quickly erode export competitiveness by making them too expensive on a global a marketplace. So, if this weekend doesn’t go as planned – Greece really needs to hammer out a deal with its creditors before next week (emergency summit planned for Saturday) – more capital may find its way into these high yielding commodity currencies, much to the chagrin of the RBNZ and RBA. In fact, a rally in their home currencies would likely prompt more verbal intervention from their respective central banks and increase the likelihood of further policy loosening.
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