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[B]New Zealand Dollar To Strengthen If Risk Trends Hold[/B]
[B]Fundamental Outlook For New Zealand Dollar: Neutral[/B]
- NBNZ Business confidence index marks second-worst reading on record
- New Zealand commodity prices rises for the first time in eight months
The New Zealand dollar advanced for the fifth consecutive week as investors moved into higher-yielding assets, and the rise in market sentiment may continue to drive demands for the commodity currency over the following week as the G20 commits additional resources to stem the downside risks for the global economy. However, as the economic calendar is expected to reinforce a weakening outlook for growth and inflation, fundamental headwinds are likely to weigh on the exchange rate as the economic downturn in the world economy intensifies. Moreover, comments from the Reserve Bank of New Zealand this week suggests that further rate cuts have yet to come as the region faces its worst recession in over a quarter century, and the central bank has warned that speculation for higher interest rates could pose a threat to the real economy as investors continue to prop up borrowing costs in hopes that the kiwi will turn out to one of the best performing currencies once the recovery begins to gain traction.
Earlier this week, RBNZ Governor Alan Bollard stated that the rise in long-term interest rates are ‘unwarranted and inconsistent with the monetary policy outlook,’ and went onto say that he expects the cash rate to ‘remain at relatively low levels for an extended period of time.’ The central bank head argued that ‘if this apparent distortion persists, it could put unnecessary pressure of the cost of borrowing by firms and households,’ which would only prolong the economic downturn in the region, and the comments suggests that the board may continue to ease policy further this month as the outlook for growth and inflation remains bleak. Meanwhile, a Bloomberg News survey shows that 7 of the 13 economists polled forecast the RBNZ to lower the benchmark interest rate by another 50bp to 2.50%, while the remaining participants are calling for a 25bp rate cut to 2.75%.
Nevertheless, the New Zealand dollar is the best performing currency against the greenback this month after losing nearly 3.5% in the first quarter of 2009, which supports a bullish outlook for the pair however, as the economic outlook continues to foreshadow a deepening recession in the region, fundamental headwinds are likely to reinforce a bearish forecast for the kiwi as the downturn in the global economy intensifies. Moreover, as the NZD/USD remains overbought, we may see a corrective retracement follow next week as the pair trade near a two-month high. - DS