New Zealand Dollar May Be Weighed By Weak Domestic Demand

RBNZ Governor Bollard has expressed discomfort over the New Zealand dollar’s appreciation as it threatens demand for exports and jeopardizes the recovery. The central bank leader’s statement that “financial markets treat us like Australia, but actually we are quite different,” shows his concern that recent “kiwi” strength is a product of the raised outlook for local interest rates based on the RBA’s actions. However, the economies are significantly different in the products that they export and the New Zealand economy isn’t expected to see the same benefits as Australia from surging growth in China. Bollard, looking to differentiate the two export driven economies and lower expectations for tightening from the central bank stated “New Zealand has had a recession and the pickup is slower and more vulnerable.”

A rise in U.S. unemployment to 10.2% could start to weigh on broader risk sentiment which could lead the high yielding “kiwi” lower. Additionally, as central bank leaders start to lay the ground work to begin their exit strategy from current stimulus efforts, the outlook for global growth could diminish. However, bullish sentiment could prevail if traders dismiss labor reports as backward looking and point toward potential profits from leaner companies that are poised to take advantage of improving demand. This week the economic calendar will provide insight into domestic demand with retail sales figures scheduled for release. Early forecasts are for a 0.4% rise following a 1.0% gain the month prior. Last month’s gains from department store and fast food sales may be hard to duplicate with more New Zealanders out of work. A drop in consumer spending would significantly lower interest rate expectations and could generate “kiwi” weakness. Despite the potential impact on price from monetary policy , the New Zealand dollar continues to take its cue from commodity prices which should be monitored when trading the currency. - JR