Question: What do currencies say about an economy? Well that’s a trick question because the answer is everything and nothing at all
See, in today’s trading markets a currency means nothing unless it’s compared against another national currency (or perhaps the price of gold). When you compare a currency against another currency, not only can it be a potential indicator of economic strength relative to other economies, but it can also tell you the general global financial mood, the appetite for risk, the stage of economic cycle – both domestic and global, about the state of inflationary pressures and about other macroeconomic and environmental forces.
To say that the New Zealand dollar (NZD or kiwi) ‘is strong’ or ‘is weak’ doesn’t mean anything at all unless it’s implied to be measured against another currency
The US dollar or the ‘greenback’ and the Australian dollar (AUD or aussie) is really the yardstick by which the NZD is most often compared. One currency pair (that is NZD against any other currency ie. NZD USD) that is often overlooked is the kiwi against the Japanese Yen or NZDJPY. It is worth check on this pair now and then because it is a good indicator of overall global economic appetite for risk.
The reason behind this is somewhat complicated but it has to do with global economic flows and that the NZD is considered an exotic go-to currency with investors are feeling lucky and that the JPY is a safe-haven currency that market players retreat to when they feel they must batten down the hatches. Combining these currencies together give us a great idea of how investors feel about the ‘markets.’
When we look at the monthly NZDJPY chart, we can see that the NZDJPY dropped significantly in tandem with the American stock exchange in 2008, rose in tandem with stocks to 2015 and then stalled in tandem with stocks from early 2015. From late 2016 to early 2018, stocks have climbed to extraordinary heights while the NZDJPY has only risen slightly (confirmed by the MACD moving average indicator at the bottom of the chart).
From early this year to today it is now stocks that have stalled and the NZDJPY seems to be starting to drop off (again as confirmed by the MACD indicator). What does this mean for global risk appetite? Historical evidence would point to the possibility that confidence in the markets is starting to wane.
Does this mean we are heading towards a crash or perhaps a global recession in the context of global interconnected markets?
It’s hard to say just yet but one thing is certain; if market analysts are saying we are in the later stages of an extraordinarily long economic cycle, make sure your seatbelt is fastened, it may get rocky.