[B]New Zealand Dollar At Risk of Turn Lower on Extreme Sentiment[/B]
[B]Fundamental Outlook for New Zealand Dollar: [/B][B]Bearish[/B]
- New Zealand Business Confidence surges to decade high
- New Zealand Dollar sentiment at clear bullish extremes – top is near
The New Zealand Dollar finished the week almost squarely unchanged against its US namesake, as a noteworthy pullback in global risk sentiment offset several bullish data releases from the antipodean economy. The National Bank of New Zealand reported that domestic Business Confidence surged to its highest levels in 10 years—painting a decidedly rosy picture for the future of business growth. Indeed, 49.1 percent of businesses expected the economy to improve over the next 12 months. Currently poor business conditions provide such a low base for growth that improvement should be relatively easy to come by. Yet we cannot deny that overall survey data points to a return to economic growth—however moderate—through the foreseeable future. Limited economic event risk in the week ahead gives little in the way of foreseeable volatility. New Zealand dollar traders should instead keep a close eye on broader financial market risk appetite as seen through the US S&P 500 and clear analogs.
Major global equity indices finished the week considerably lower on a broad deterioration in risk sentiment, and the dramatic downturn from 2009 highs bodes poorly for near-term outlook. Indeed, the US S&P 500 declined for four consecutive trading days through Friday and finished a noteworthy five percent off of its recent peak. Especially overstretched New Zealand dollar positioning leaves the NZDUSD at large risk for a noteworthy correction. Yet as we often warn, sentiment can and does remain extreme for extended periods of time. The combination of the deterioration in global financial risk sentiment and overextended NZDUSD positioning leads us to believe that New Zealand Dollar risks remain to the downside. Whether or not the NZD turns lower will very much depend on the trajectory in the S&P 500 and broader risky asset classes. - DR