The group of currencies known as safe havens may be about to get a couple of new members. The Aussie and the Kiwi, traditionally associated with risk, have shifted to the other end of the FX spectrum and seem to be acting like safe havens. Along with the Swissie and gold, both the Kiwi and the Aussie dollars have reached record highs versus the dollar in recent weeks.
But what makes a safe haven and will the pacific currencies be able to make the jump to safe haven territory indefinitely? To determine this it is necessary to analyse what is the criteria to be an FX harbour in a storm.
The chief characteristics include a stable political system, low debt levels (or if debt is high then the majority of debt should be held domestically), traditionally low levels of inflation (thus higher purchasing power parity) and lower than average interest rates (for example, the average interest rate for Switzerland over the last decade is just 1.17%, compared with 2.44% for the ECB).
Higher interest rates tend to be associated with higher levels of risk, so it figures that safe havens should have low rates.
So how do the Aussie and the Kiwi match up?
- Both Australia and New Zealand have stable political systems.
- Australia's debt as a % of GDP was 22.4% at the end of 2010, this is one of the lowest levels in the developed world and compares with nearly 60% for the US and 80% for the UK.
- New Zealand's debt was an equally impressive 25.5% of GDP last year.
- Over the last 10-years Australia's average rate of Trimmed Mean inflation is 2.9%, New Zealand's is 2.3%
- Over the last 10-years Australia's average interest rate has been 5.13%, New Zealand's was 5.63%
As you can see, both Australia and New Zealand tick the safe haven box when it comes to politics and low debt levels, but their average inflation rates and interest rates are much higher than is typical for safe havens.
At the moment the markets are focused on debt levels due to the Eurozone sovereign crisis and the US debt ceiling issue, so investors want to buy currencies with stable fiscal policies that are not laden down with vast amounts of public debt. The de-leveraging theme in the developed world could last for some time, so we think this may support the Kiwi and the Aussie over the medium-term.
However, if markets get more sanguine on debt levels then the focus might return to growth and yield. This is also supportive of the Aussie and the Kiwi as they have good growth prospects relative to other western nations, they don't need to embark on harsh austerity budgets and they have close trade relationships with fast-growing Asian markets.
So we may be in a sweet spot for the Pacific currencies, but rather than pure safe havens they are trading more like safe haven - growth hybrids.
But, this comes with a caveat. The New Zealand central bank held interest rates last night, but in the accompanying statement it sounded worried about the strength of the Kiwi, saying: "The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term."
The Reserve Bank of Australia took this line on Aussie strength for most of this year, however, recently it has supported currency strength as a way to dampen inflation.
So although the Kiwi may end up being a victim of its own success, if strong currencies dampen inflation pressures then the Aussie and the Kiwi may start to look even more like safe havens...
We will be monitoring these pairs to see how they react to 1, a resolution of the US debt crisis or 2, the US hitting its debt ceiling on August 2 with no deal from Congress, to see if the safe haven theme continues to play out.
Is the Aussie a safe haven? AUDUSD (white line) has been trading in line with the SPX 500 (orange line) for most of the past year, but the two have recently started to diverge as markets have focused on the Aussie's superior fiscal fundamentals
NZDUSD: this pair has shrugged off the warning from the RBNZ that rates won't rise if the Kiwi continues to strengthen. Currently it is just above its pivot point at 0.8715, which suggests an uptrend. Short-term resistance lies at 0.8750 then at 0.8800. If it loses some steam/ a resolution is found to the US debt crisis then initial support lies at 0.8665 then at 0.8630.
NZDUSD hourly chart with moving averages
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Kathleen Brooks| Research Director UK EMEA | FOREX.com
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