Relief Rally Likely For New Zealand, But Broad Outlook Remains Bearish

[DailyFx]

While the economic calendar will do little to reverse the bearish fundamental outlook on the economy, the New Zealand dollar may find short-term strength in rebounding risk appetite. Westpac’s gauge of consumer confidence may improve a bit in the third quarter having printed at a 17-year low in the three months to July.








Relief Rally Likely For New Zealand, But Broad Outlook Remains Bearish

Fundamental Outlook for New Zealand Dollar: Bearish

- Manufacturing Activity slumps sharply in the second quarter, falling -0.6%
- Current Account sees record deficit as commodities peak

While the economic calendar will do little to reverse the bearish fundamental outlook on the economy, the New Zealand dollar may find short-term strength in rebounding risk appetite. Westpac’s gauge of consumer confidence may improve a bit in the third quarter having printed at a 17-year low in the three months to July. Since then, oil has fallen over 30% while the Reserve Bank of New Zealand has sharply reduced borrowing costs and signals it will continue to slash rates for the foreseeable future. Expectations of forthcoming tax cuts may also add lift: Finance Minister Michael Cullen’s latest budget plan (announced in May) includes a plan to cut NZ$10.6 billion in taxes over four years starting in October. That said, sentiment still faces forceful headwinds as consumers weigh up a slowing economy, persistently tight global credit conditions (affecting everyone’s ability to borrow, including New Zealand), and a substantially weaker home currency. To date, the New Zealand dollar is down 11% since mid-July.

Gross Domestic Product figures are set to reveal the economy shrank -0.4% in the second quarter following a loss of -0.3% in the first three months of the year. Two consecutive quarters of negative growth puts New Zealand formally into recession. Sliding economic performance has been loudly addressed by the Reserve Bank of New Zealand: borrowing costs have shed 75 basis points in the past two months and are expected to lose 150bp more over the next 12 months.

Put simply, the fundamental forces driving the New Zealand dollar are firmly bearish. That said, the break-neck pace of the Kiwi’s decline against the US dollar has created deeply oversold conditions. This means that those traders that were willing to sell NZDUSD at had mostly done so already, capping bearish momentum. Expectations that the US Fed and Treasury department will announce a comprehensive plan to relieve current financial market turmoil could see a significant rebound in risk appetite next week, yielding upward momentum to higher-yielding currencies. As the New Zealand dollar rises, new bears will be attracted by a better selling price, allowing for the next leg of the long-term down trend. - IS