New Zealand Dollar Strength May Be its Own Undoing

[B][B]New Zealand Dollar Strength May Be its Own Undoing[/B][/B]

[B]Fundamental Forecast for New Zealand Dollar: [/B][B]Bearish[/B]

The New Zealand dollar traded virtually lock-step with global financial risk appetite, dropping through early-week S&P 500 tumbles but finishing higher on the subsequent recovery. We had previously forecast that the infamous “September Effect” could lead to a sharp correction in major equity indices and similar pullbacks in the New Zealand Dollar, but the lack of follow-through in early-week declines suggests markets are unwilling to force major breakouts in key asset classes. We expect the New Zealand Dollar will continue to track moves in the S&P through the week ahead, but it will likewise be critical to watch for reactions to the upcoming Reserve Bank of New Zealand interest rate announcement.

The RBNZ is very widely expected to leave interest rates near lows of 2.50%, but the New Zealand Dollar could quite easily move on unexpected commentary following the decision. The recent Reserve Bank of Australia rate announcement quickly pushed the Australian Dollar lower as the RBA showed little indication it was likely to raise interest rates through the foreseeable future. We get the sense that the RBNZ could likewise dump cold water on rate hike speculation and force similar pullbacks in the yield-sensitive NZD. Though recent economic data shows that domestic activity is generally recovering, the RBNZ tends to place considerable weight on the New Zealand Dollar exchange rate in setting interest rates. Given that the NZ$ trades near 2009 highs, import prices will likely remain low while export industries may lose competitiveness in the global market.

New Zealand Dollar strength may very well be the currency’s own undoing, and it will be very important to watch any RBNZ references to the NZD exchange rate following the upcoming interest rate announcement. Otherwise, it remains critical to watch for any substantial shifts in financial market risk sentiment. - DR