nzd

New Zealand Dollar To Weaken as Employment, Wage Growth Falter

New Zealand Dollar To Weaken as Employment, Wage Growth Falter

Fundamental Forecast for New Zealand Dollar: Bearish

    Reserve Bank of New Zealand Holds Benchmark Interest Rate Steady
    New Zealand Business Confidence Tips Lower in October
    Trade Deficit Narrows as Imports Tumble

The New Zealand dollar tumbled 3.75% against the greenback this week as investors scaled back expectations for higher interest rates in the $128B economy, and the currency may continue to face increased selling pressures in November as the economic docket is expected to reinforce fears of a protracted recovery in the isle-nation. The Reserve Bank of New Zealand held the benchmark interest rate at 2.50% this week and pledged to maintain borrowing costs at the record-low throughout the first-half of the following year in order to foster a sustainable recovery. The central bank saw “no urgency to begin withdrawing monetary policy stimulus” this month and held a dovish outlook for inflation as the board anticipates price growth to hold “comfortably within the target range over the medium term,” but noted that business spending along with credit lending remained “very subdued” throughout the region. Moreover, the RBNZ said that the marked appreciation in the exchange rate “has limited the scope” for an export-led recovery, and sees the current account deficit widening over the medium-term as global trade conditions remain far from favorable. As a result, Credit Suisse overnight index swaps shows investors see a 2% chance for a rate hike in December, while market participants speculate the RBNZ to raise borrowing costs by more than 200bp over the next 12-months, and uncertainties surrounding the economic recovery may continue to weigh on interest rate expectations as policy makers anticipate growth and inflation to remain subdued going into 2010.

At the same time, Prime Minister John Key argued that New Zealand dollar is “a little bit overvalued” and said that he would “prefer a lower exchange rate” to help support the recovery, but went onto say that “it is very difficult” for the government to temper the appreciation following the weakness in the global reserve currency. In addition, Mr. Key saw a risk for the government budget to stay in deficit “for a decade” after marking the first short-fall in nine-years, and the cautious outlook held by policy makers may continue to drag on the New Zealand dollar as investors weigh the prospects for a sustainable recovery. Nevertheless, the economic docket for the following week is expected to reinforce a weakened outlook for household spending as economists forecast employment to fall 0.3% in the third quarter, with the jobless rate anticipated to reach a nine-year high of 6.4% from 6.0% in the three-months through June, while private wages are projected to rise 0.3% during the same period, which would be the lowest level of growth since 2000. As a result, we may see the NZD/USD continue to test the 50-Day SMA at 0.7170 for near-term support however, the kiwi-dollar may continue to retrace the advance from earlier this year and break below the moving average, which would expose the 100-Day SMA at 0.6846, as investors curb expectations for higher borrowing costs in New Zealand. However, as risk trends continue to dictate price action in the currency market, a rise in risk appetite may lead the pair to retrace the sharp decline over the following week and could test the 10-Day SMA (0.7448) for resistance. - DS

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