New Zealand Dollar to Fall for Fourth Week, RBNZ to Cut 50bp to 2.50%

The New Zealand dollar slipped lower against the greenback and the Japanese yen this week as investors curbed their appetite for high-yielding assets, and as policymakers are expected to take further steps to shore up the $128B economy, projections for a 50bp rate cut by the Reserve Bank of New Zealand is likely to weigh on the exchange rate over the following week.

[B]
New Zealand Dollar to Fall for Fourth Week, RBNZ to Cut 50bp to 2.50%[/B]

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

The New Zealand dollar slipped lower against the greenback and the Japanese yen this week as investors curbed their appetite for high-yielding assets, and as policymakers are expected to take further steps to shore up the $128B economy, projections for a 50bp rate cut by the Reserve Bank of New Zealand is likely to weigh on the exchange rate over the following week. A Bloomberg News survey shows that 10 of the 12 economists polled forecast the RBNZ to lower the benchmark interest by half a percent to a record-low of 2.50% however, some have argued that the expansion in monetary and fiscal policy has paved the way for a recovery later this year, and are placing their bets for a 25bp rate cut and predict that the central bank will conclude its easing cycle this month. Meanwhile, others anticipate the central bank to hold a dovish policy stance over the medium-term as the outlook for growth and inflation falter, and as a result, deteriorating fundamentals paired with expectations for lower borrowing costs is likely to weigh on the NZD/USD over the near-term, and we may see the currency pair continue to retrace the advance from March in the week ahead.

Earlier this week, the International Monetary Fund lowered their growth forecast and expects the world economy to contract 1.3% this year amid an initial projection for a 0.5% drop in global activity, and went onto say that the RBNZ should take further steps to shore up the isle-nation as trade conditions falter. As the IMF expects the downturn in the global economy to intensify throughout the year, the fund forecasts GDP to contract 2.0% this year while they anticipate the growth rate to increase 0.5% in 2010, and the remarks reinforces the Organization for Economic Cooperation and Development’s call for the central bank to lower the official cash rate to 2.00% as the region faces its worst economic downturn in over three decades. However, as Governor Alan Bollard remains reluctant to overshoot the interest rate, the group has argued that the nation’s high level of short-term foreign debt ‘implies that there is little room for further fiscal expansion,’ and went onto say that ‘the much improved inflation outlook allows scope for further easing.’ Accordingly, dovish commentary following the rate decision could spark a sell-off in the kiwi-dollar but nevertheless, as risk trends continue to dictate price action in the financial markets, the G7 and the G20 meeting in Washington D.C. may help to boost market sentiment as global policymakers tackle the downturn in the world economy, and increased demands for higher risk/reward investments could the currency pair higher over the following week. - DS