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NZ dollar breaks correlation with US stocks , heading lower

17 Mar 2010 10:05Peter Waring


Is the Kiwi dollar's dream run over?


Since the global financial crisis took hold in late 2007 or early 2008 - the Kiwi dollar has been very highly correlated with the US stockmarket - basically as the Kiwi dollar can also be viewed as a measure of risk sentiment. As panic took over during the collapse of Lehman Brothers and other investment banks, the NZ dollar fell down to a low of about 48c, closely tracking the collapse of the sharemarket. But since the low in March 2009 the Kiwi dollar steadily climbed to hit a peak at around 76c to the USD in October the same year.

The below chart shows the NZD/USD plotted against the S&P500 sharemarket value since 2007 until today. The green lines show the periods where the NZD has broken it's correlation with the S&P500 and trended in a different direction. There was one such period from mid 2007 to early 2008 where the NZD appreciated and the Stockmarket was falling, and also from October 2009 until today where the Kiwi dollar has been falling against the USD while the stockmarket has continued its rally.


So why is the NZD in a downtrend?


The answer to this is not exactly simple as there are many factors that are drive the NZD/USD rate. There is an excellent analysis of what drives the NZD on Rodney Dickens' website which can be accessed here
. Prices for New Zealand's export commodities look to be on a steady uptrend so this cannot be attributed to any NZD/USD weakness. At present it looks like the NZD is stuck in the middle of its downwards trending channel and could break out either way.

My view is that the market currently sees that the recovery in the US will be stronger or faster than in New Zealand and since the NZD/USD tracks the relative performance of the two economies fairly well (as Dickens has shown) then this works in favour of bets for the USD.


Peter Waring

www.marketsunplugged.com


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