New Zealand dollar to shrug off global economic sluggishness

The New Zealand dollar is poised to maintain its strength as much of the rest of the developed world deals with the prospects of sluggish economic growth according to Russell Investments’ Australian investment strategist Andrew Pease.

In New Zealand for Workplace Super NZ’s conferences in Auckland and Wellington, Mr Pease says the New Zealand dollar is undervalued relative to the Australian dollar.

“Although the New Zealand dollar is strong relative to the US, there is room for gains against the Australian dollar,” he says. “With many of the factors driving the Australian dollar looking less supportive, and the US facing an uphill battle, the fundamentals look good for the strength of the NZ dollar.”

“While the sovereign risk issue is and will remain a major concern for world markets, both Australia and New Zealand should prove resilient to further shocks due to their strong fiscal positions,” Mr Pease said.

US economy to face an uphill battle

While the threat of a double dip recession has faded there, Mr Pease says the US economic recovery is expected to be a protracted process as households deleverage and fiscal stimulus winds down. Continuing efforts by banks to clean up their balance sheets will also keep a question mark over the robustness of the economic recovery.

“Consumer spending has not returned to the extent required to support the economy and unemployment looks like it will remain stubbornly high for some time,’ Mr Pease says. “Banks have largely dealt with the sub-prime losses, but they now face escalating loan losses arising from the severity of the recession. A ‘V’ shaped economic rebound seems highly unlikely.”

A V-shaped recovery may actually cause problems of its own, he warns. A rapid recovery in the US economy could stoke further concerns about the Fed’s easy monetary stance, resulting in higher long-term interest rates. Mr Pease says the most likely scenario for investors is the deep ‘U’, where the recovery from recession is prolonged while the deleveraging process occurs. While modest growth should allow corporate profits to recover, interest rates will remain anchored by the lack of inflationary pressure.

A further unknown is the fate of the huge pool of money still sitting in low-return money-market funds in the US, which is still worth over 30 per cent of the value of the S&P 500.

“The investors that pulled out of shares at the bottom of the bear market last March are only slowly returning.” he says. “A lot of investors presumably sold at the bottom and missed the rebound. This cash could move rapidly back into the market should a run of positive news have investors worried about missing out on further gains.”

“We are going through a time of uncertainty. Investors are shifting their expectations of the returns they can expect in the future. This implies significant volatility in the market for the rest of this year.”

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Founded in 1936, Russell Investments is a global financial services firm that serves institutional investors, financial advisers and individuals in more than 40 countries. Over the course of its history, Russell’s innovations have come to define many of the practices that are standard in the investment world today, and have earned the company a reputation for excellence and leadership.

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