The New Zealand Dollar was able to produce a major bullish breakout against US Dollar, the Yen and Euro while meaningful gains were made against the Pound and Australian Dollar. However, we should not take this technical headway to mean that we are in the clear. Fundamental traders know that this move is fully dependent on risk appetite as well as the kiwi’s ongoing positive correlation to investment sentiment – and both are more fragile than you may think.
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[B]New Zealand Dollar Lost Between Risk Appetite and Recession[/B][/B]
[B]Fundamental Forecast for New Zealand Dollar: [/B][B]Bearish[/B]
- The unemployment rate jumps to a 9 year high, further handicapping an economic recovery
- Wages grow at their slowest pace in nine years, well below consumer-level inflation
- While the other kiwi crosses have broken higher, NZDUSD has put in a large end-of-week reversal. What does it mean?
It is hard to miss the massive spike in the New Zealand dollar this past Friday. It was most prominently seen in NZDUSD (largely because of the extraordinary reversal that quickly retraced the commodity currency’s gains); but a look to the crosses show that this volatility was not unique to the dollar-based major. In fact, the kiwi was able to produce a major bullish breakout against the yen and euro while meaningful gains were made against the pound and Australian dollar. Up against both its high and low risk counterparts, the New Zealand dollar has clearly taken heed of a sharp rise in risk appetite. However, we should not take this technical headway to mean that we are in the clear. Fundamental traders know that this move is fully dependent on risk appetite as well as the kiwi’s ongoing positive correlation to investment sentiment – and both are more fragile than you may think.
In the week ahead, the New Zealand dollar will first and foremost take its direction from the direction and intensity of risk appetite. After the better-than-expected US labor data, we have seen a healthy boost in most of the high yield assets; but unusually enough, we have also seen an advance in the US dollar (which is typically on the short-side of positions that are buoyed by optimism). This is not only something to consider for NZDUSD, but for the broader currency market as well. Is this a sign that the dynamics between sentiment and yield demand are breaking down? Is a high benchmark rate no longer the top quality of a long-risk position? Not likely. However, this shift could certainly raise the importance of economic prospects when grading a carry currency. The opening hours, session and day will be essential for establishing the market’s taste for risk for the rest of the week and perhaps beyond. Looking to last week, for example, Monday’s rally immediately stalled as it came without catalyst or fundamental fuel to keep the move going. This time around, we have a spark for the move; but momentum may not carry itself. There are GDP readings, policy officials forecasts and other leading indicators due from the majors (adding to the general outlook for positive growth); but there is a conspicuous lack through the beginning of the week – exactly when it is most needed.
Turning the macroscope back on the kiwi, we need to keep an eye on the short-term volatility and the currency’s correlation to risk appetite; which could both be swayed by the listings on the docket. A surprisingly, full economic calendar holds indicators that are not only market moving for those short-term event-risk traders but also influential for long-term growth forecasts. In fact, data will cover consumer spending, lending, housing and business activity – most of the critical components of GDP. The REINZ home sales and QV inflation reports for July will gauge both volume and value for a good reading on the sectors health as well as its general contribution to economic activity. The retail sales data is likely to be the most market moving. The June figures will round out the second quarter (which will also be tallied) to bring us one step closer to the 2Q GDP that isn’t due until September 21st. Credit flow is an essential element of a healthy economy that has garnered much more respect recently; but it is nonetheless still underappreciated in New Zealand. Credit card spending and housing activity are two indicators that offer a gauge for practical demand for loans and its general availability. Finally, the Business PMI report for July will take stoke of manufacturing – a component of growth that has its roots in both domestic and foreign demand.