The New Zealand Dollar may see substantial selling pressure in the week ahead as an interest rate decision is amplified by a reversal of recent strength in risk appetite.
[B]New Zealand Dollar Threatened with Rate Decision, Risk Trend Reversal[/B]
[B]Fundamental Outlook For New Zealand Dollar: [/B][B]Bearish[/B]
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The New Zealand Dollar may see substantial selling pressure in the week ahead as an interest rate decision is amplified by a reversal of recent strength in risk appetite. The Reserve Bank of New Zealand has not been shy about expressing their dovish posture, with Governor Alan Bollard saying unequivocally that the RBNZ “considers it appropriate to provide further policy stimulus to the economy” and “expects to keep [interest rates] at or below the current level through until the latter part of 2010.” Two weeks after April’s 50bps rate cut, RBNZ Deputy Governor Grant Spencer noted that the bank has been “disappointed” with the economy’s response but reiterated that the bank is “not considering at this point changing our policy approach,” adding that “there is still potential scope for monetary policy leverage.” On balance, such comments suggest that although economists currently forecast that rates will remain unchanged at 2.5%, the door is wide open for a surprise reduction.
Turning to risk sentiment, markets appear to be showing signs of slowing momentum as the breakneck rally that started in early March increasingly looks to have outpaced the fundamentals. Indeed, markets are now trading at the highest levels in five years relative to earnings. Given the outlook for global spending and employment, it seems highly unlikely that the magnitude of any recovery in global growth will warrant the kind of robust rebound in risky assets that traders have seen in recent months. Technical positioning tells a similar story, with the MSCI World Stock Index showing an Evening Star bearish reversal candlestick formation at double top resistance last tested in October and November of 2008. The MSCI metric is now 83% correlated with a trade-weighted average of the Kiwi’s value against top counterparts, suggesting that any reversal in risky assets will bring the New Zealand unit along for the ride. - IS