The New Zealand dollar is the weakest link if the global recovery falters.
One reason is because on Oct. 5 New Zealand’s finance minister warned a group of investors in Hong Kong that “there’s some risk of another down leg depending upon how the recovery shapes up.”
If New Zealand’s finance minister is being that honest, then you know there is something to be concerned about.
Traders have thought that New Zealand was totally out of the woods and that’s why they’ve run up the New Zealand dollar a full 22 percent against the greenback in the last six months.
However, that leads me to another one of my concerns. The huge appreciation of their currency in that short of an amount of time runs the risk of hurting their export sector. About 30 percent of their economy is dependent upon exports.
But if their dollar appears to be too expensive against the U.S. dollar, then their exporters could lose a ton of business as people shy away from New Zealand’s commodities. They can always turn to cheaper places for these same goods.
That leads me to my next concern: Commodity prices. If commodity prices don’t hold up, then New Zealand can’t command a high price for their goods. If they have to keep prices low, then their profit margins are low.
So between an expensive New Zealand dollar and struggling commodity prices, there is a real downside risk to the New Zealand dollar from this point on. If traders think for an instant that the global economy is hiccupping or going into another slump, they will sell the New Zealand dollar first and ask questions later.
Just because New Zealand’s economy expanded for the first time in six quarters doesn’t mean they are out of the woods by any means. After all, they just had the worst recession in three decades.
Here’s my final concern. Effective currency intervention isn’t an option for this very small country. They don’t have the firepower needed within their central bank to be effective at bringing down their dollar’s value. They’ve tried this before, only to be laughed at by the market as traders took it higher.
This is not just my opinion. The finance minister confirmed this about a month ago in a speech. Even they realize now that they are helpless to stem the rise of their currency if the market chooses to take it higher.
So for New Zealand, it’s not as simple as hammering its currency by selling it aggressively in the market. New Zealand’s pockets don’t run deep enough to do this effectively.
However, if the global recession falters, the market will bring down this currency on its own.
So be watchful of an economic downturn. If we get it. . . think “New Zealand dollar.” The short sellers of the currency would likely win out at that time and the buyers of the currency would just have to scamper to the sidelines as the balance of power shifts once again.
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