New Zealand Dollar in Trouble!

Tue, Jul 15 2008, 14:53 GMT
by Jack Crooks

Money and Markets


Last week I told you the U.K. could see a worse economic downturn than the U.S., and said that would weigh heavily on the British currency.

Meanwhile, one of my readers who resides Down Under recently told me that he's afraid to trade the Australian dollar.

Reason: He sees the economy first hand, and he's starting to see a disconnect between on-the-ground conditions and the Aussie dollar's rocket-ride to multi-decade highs.

Clearly, the risks aren't just limited to the United States ... at least not anymore. And today I want to tell you about another currency that looks ripe for weakness ...


New Zealand: From Fairy Tale to Tail Spin

Known primarily for its agricultural activity and natural resources, New Zealand has been quietly living the good life. After all, the commodity-price bullet train has boosted prices for all kinds of foods, metals and energy products.

Meanwhile, the central bank's benchmark interest rate made investing in New Zealand rather attractive.

End result: Over the last several years, the New Zealand dollar has appreciated quite notably versus the greenback. You can see its steady climb higher in the following chart ...

Chart

But this trend could be set to change. Here's why ...

First of all, Allen Bollard, one of the Reserve Bank of New Zealand's (RBNZ) governors, recently expressed the need for rate cuts. He cited the softening New Zealand economy, and I can see why. Here are five signs that stick out like sore thumbs:

  • * New Zealand's first-quarter GDP contracted for the first time since 2005.
  • * Export volumes slumped 3.5% in the same period.
  • * For the month of May, home sales fell to their lowest levels in 16 years.
  • * Retail sales in the first quarter fell at the fastest pace in 11 years.
  • * And the labor market is showing signs of rolling over — unemployment jumped 0.2% in the first quarter.
And it's not just Mr. Bollard who feels iffy. An RBNZ survey revealed similar concerns among business managers, who said they expected:
  • * Inflation rising each of the next two years.
  • * GDP growth contracting over the next year.
  • * Unemployment increasing over the next two years.
  • * And most importantly, monetary conditions beginning to ease at the start of 2009.

I say "most importantly" because the state of monetary policy has been a big driver of New Zealand dollar strength. And the way things are going, it's set to be a big driver of New Zealand dollar weakness over the coming months.


Interest Rates Giveth, And Interest Rates Taketh Away

Think about it this way: The benchmark interest rate of the Reserve Bank of New Zealand sits at 8.25%.

That's comfortably higher than the Reserve Bank of Australia (7.25%), the Bank of England (5%) and the European Central Bank (4.25%).

And it's considerably higher than the Bank of Canada (3%), the Swiss National Bank (2.75%), the U.S. Federal Reserve (2%) and the Bank of Japan (0.5%).

Simply put: The RBNZ interest rate has garnered quite a bit of New Zealand dollar investment.

But now two things are happening that could quickly reverse this appeal.

First, interest rates at the RBNZ need to come down. If they don't, policy makers risk choking off New Zealand's economy to an even greater extent. I mentioned the main points of weakness already. It's clear that top ranking officials, as well as the businessmen elbow-deep in the economy, agree that New Zealand is headed towards recession should conditions not improve dramatically.

When rates start coming down on a relative basis, then capital begins fleeing.

Second, risk-takers can't take it no more. Even if central bankers start cutting the RBNZ interest rate, they've got quite a ways to go before they reach the level of most other major central banks' rates. That could mean the New Zealand dollar maintains a bit of interest rate appeal. But the thing is, even more money will flee if risk aversion takes hold of the markets.

When investors are comfortable taking risks, borrowed money typically flows into high-yielding investments. The New Zealand dollar, at 8.25%, is one such high-yielding asset. But when investors become fearful, they begin running for the exits.

And right now, the stock markets — a major place for risk taking — are telling me that a flight to safety could happen suddenly. Stocks, particularly in the U.S., are looking nasty. So nasty that the S&P 500, the Dow Industrials and the Nasdaq have recently been officially declared to be in "bear markets."

If and when risk-takers give in to their fears, money that's been stashed away in New Zealand dollar assets could quickly be yanked away. The result — notable depreciation in the New Zealand dollar.

One last thing to keep in mind is how this would play into the U.S. dollar story ...

As much as I would like to tell you the U.S. economy is making notable improvements, I can't yet do that. And thus, I can't use that as a reason for a rebound in the greenback.

However, as other major economies begin to break down, their currencies will eventually follow. And that means the U.S. dollar, as far as currency traders view it, becomes relatively less toxic.

Look, major changes are in the works. Before we know it, the dollar could be emerging from despondency as other currencies slip into it.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Weiss Research, Inc  | 15430 Endeavour Drive. Jupiter, FL 33478-6400 - USA
http://www.moneyandmarkets.com | eletter@moneyandmarkets.com

Legal disclaimer and risk disclosure

Money and Markets e-newsletter is published by Weiss Research, Inc. Weiss Research, Inc. is strictly a research publishing firm and does not provide individual investment advice to its subscribers. The information we publish is based on our opinions plus our statistical and financial data and independent research. Although we make every effort to provide the most accurate and updated information possible, our information cannot take into consideration your personal finances and goals, and therefore is not intended to be used as customized recommendation to buy, hold, or sell securities, or engage in any trading strategy. Such recommendations may only be made by a personal advisor or the broker you select. Most investments involve risk of loss. Although this service makes every effort to protect your principal, you can lose money. Therefore, it is not for all of your funds. If your goal for a certain portion of your funds is strictly capital preservation, we believe you should invest those funds in conservative investments such as short-term U.S. Treasury securities or equivalent. For more information on prudent investing, see also the information available at the websites of the Securities and Exchange Commission at www.sec.gov and the Financial Industry Regulatory Authority at www.finra.org. Most of the information we publish is derived from primary sources, including the U.S. government agencies as well as the financial institutions or publicly traded companies we cover. We believe our data sources are accurate, but we do not verify their accuracy independently. Therefore, we cannot assure you that the information is accurate or complete. Nor do we guarantee the success of any investment decision you may make using our data, information, or recommendations. To help us track the performance of this service, subscribers are asked to give their brokers’ permission to share statements with us strictly for the purpose of substantiating the results of the trading. If broker documents are available on a particular trade, we use them to calculate the net, after-commission profits on the trade. Naturally, the results of each subscriber may differ depending on the actual prices achieved and the commissions paid. If broker documents are not available on a trade, we estimate the pre-commission gains based on the market prices following the publication of each recommendation. In addition, examples of potential performance returns may sometimes be based on simulated — not actual — trades, assuming entry and exit prices that could have been obtained during regular market conditions. These entry and exit prices calculated do not reflect or include costs of spreads, market delays, or fees and commissions. Similar returns may or may not be actually achieved by subscribers. While every effort is made to evaluate the actual experience of subscribers, most performance figures must be considered hypothetical, and past results are no guarantee of future performance. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. References to examples of past performance are not intended to provide a total picture of portfolio results. Your results may vary considerably depending on a series of factors, including: (a) when you begin or cease investing, (b) which recommendations you choose to act on, (c) how much money you choose to invest in each recommendation, (d) the specific prices you get, (e) the broker commissions you pay, (f) the interest income you earn on uninvested funds, and (g) the number and magnitude of losing or winning trades you experience. With the exception of exempt securities such as government securities and mutual funds, all Weiss Group, Inc. and Weiss Research, Inc. personnel are prohibited from purchasing any security or investment that is recommended in its publications, per the company’s Personal Securities Transaction (PST) policy. LIMITATION ON WEISS RESEARCH’S LIABILITY Weiss Research’s liability, whether in contract, tort, negligence, or otherwise, shall be limited in the aggregate to direct and actual damages not to exceed the fees received by Weiss from Subscriber. Weiss will not be liable for consequential, incidental, punitive, special, exemplary, or indirect damages resulting directly or indirectly from the use of or reliance upon any material provided by Weiss. Without limitation, Weiss shall not be responsible or liable for any loss or damages related to, either directly or indirectly, (1) any decline in market value or loss of any investment; (2) a subscriber’s inability to use or any delay in accessing the Weiss website or any other source of material provided by Weiss; (3) any absence of material on the Weiss website; (4) Weiss’ failure to deliver or delay in delivering any material or (5) any kind of error in transmission of material; or (6) the use by a subscriber of any research to invest in any way which may be deemed unsuitable in accordance with certain industry standards. Weiss and Subscriber acknowledge that, without limitation, the above-enumerated conditions cannot be the probable cause of any breach of any agreement between Weiss and Subscriber. "No-risk" and "risk-free" refer solely to the subscription price refund policy. DISCLAIMER OF WARRANTY ANY AND ALL MATERIAL PROVIDED BY WEISS IS PROVIDED "AS IS" AND WEISS MAKES NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

Interested in forex trading? forex brokerage firms!


Interbank FX, LLC
Contact the broker/FDM
Open a demo account
MG Financial Group
Contact the broker/FDM
Open a demo account
Deutsche Bank
Contact the broker/FDM
Open a demo account
GFX Group SA
Contact the broker/FDM
Open a demo account
Ingot Brokers
Contact the broker/FDM
Open a demo account

FXstreet.com will give you a 3 months membership as soon as minimum rebates have been generated (€150 for private trader/ €300 for corporate trader)

[Read Premium full description]


Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer.

Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management.

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

©2008 "FXstreet.com. The Forex Market" All Rights Reserved.