New Zealand Dollar Looks For Support From Risk Appetite

The New Zealand Dollar bounced from support at 0.6176-the 38.2% Fibo of 0.5489 - 0.6598 aided by a rate hold from the RBNZ.

[B]Fundamental Outlook For New Zealand Dollar: [/B][B]Bearish[/B]

The New Zealand Dollar bounced from support at 0.6176-the 38.2% Fibo of 0.5489 - 0.6598 aided by a rate hold from the RBNZ. The central bank left their target cash rate at 2.50% as expected, but some market participants had started to price in a possible 25 bps rate cut. Governor Bollard reiterated the central bank’s stance that they would keep interest rates at the current level or lower until 2010. However, the central bank forecasted that growth would return to the country by the end of 2009. Indeed, we have started to see the global outlook for growth continue to improve as interest rate cuts and stimulus plans begin to gain traction. This has led to a surge in commodity prices, in particular oil reaching above $72 bbl, which has also provided “kiwi” support. A 0.5% increase in retail sales in April added to the bullish sentiment with consumers eating out and visiting departments stores more often. However, the manufacturing index fell form 43.7 to 42.7 as it remains in contraction. The New Zealand dollar has regained over 25% against the dollar over the past three months which has raised concerns that it will stunt the pace of recovery for the economy as it makes exports more expensive.

The RBNZ has become concerned with the appreciation of the New Zealand dollar, which led to Governor Bollard to voice his concerns and commit to keeping rates on hold. We may see the central bank continue to try and use verbal intervention to keep traders honest, but the “Kiwi” may continue to gain until they show some teeth and physically intervene. We won’t see the level of event risk that we saw last week as but manufacturing and service sector indicators will give us some insight into the prospect of an economic recovery. Manufacturing activity is forecasted to fall by 1.0% which would be the fifth straight quarter and could weigh on the NZD/USD considering the country’s reliance on exports to generate growth. We will also see the a reading for the service sector which could see an improvement as optimism is rising and generating domestic growth. Nevertheless, the main drivers of New Zealand dollar price action should continue to be risk appetite and commodity prices which currently go hand in hand. However, given the recent sharp rise in commodity prices the sector is susceptible to a pull back which we started to see on Friday. Likewise, equity markets have stalled as markets process the impact of the higher costs on the global recovery. Therefore, a retrace back to support at the 20-Day SMA at 0.6259 is a possibility, which has held since 5/04. Continued bullish sentiment should lead to a test of the 6/2 high of 0.6597 with the 9/22 high of 0.6955 as possible ultimate resistance. -JR