New Zealand Dollar Riding the Coattails of the Aussie, Risk Appetite

Though the long-awaited revival of risk trend (appetite or aversion) may not come roaring back to life this week; it is important to be prepared in case it should. For the New Zealand dollar, sensitivity to investor confidence is blatant. A relatively small economy with agricultural exports and a smaller financial market; the kiwi dollar is considered a major currency for one reason: it is historically a high yielding currency. Global investors seeking requiring a relatively high return and deep liquidity have developed self-reinforcing characteristics. However, the New Zealand dollar is not the ideal long-yield trade among the majors. The Australian dollar already enjoys a significant yield advantage over its smaller counterpart; and the RBA has already acted to put its benchmark on a positive trajectory. However, interest rate expectations priced into the market show traders are forecasting that when the RBNZ does turn hawkish, the yield differential will quickly swing back into the kiwi’s favor. Currently, Credit Suisse overnight index swaps are pricing in only a 4 percent chance of a hike at the next central bank meeting; but over the next year, the benchmark will 207 basis points (or a little over 2.00 percent points). If bank Governor Alan Bollard can return the nation to a hawkish regime before risk appetite falls apart, the currency may be able to offset much of its losses through appreciation through rate forecasts. On the other hand, if traders start to lose their grip before the currency is prepared, the fact that the kiwi has trailed the Aussie dollar sans its fundamental strengths (growth, financial stability, fiscal health, rising yields) will likely amplify its own plummet.

Betting on risk trends can be a tenuous and disappointing game. A more reasonable effort can be made in benchmark foreseeable event risk and gauging its potential impact on the fundamental outlook and short-term volatility for the currency. Looking at this week’s docket, we have a few notable economic releases; but it is important to define their influence. For immediate impact, the NZIER Business Opinion Survey for the fourth quarter is without doubt the most promising report for a notable swing. Offering a view at a critical component of the economy is enough to garner traders’ attention. From a fundamental point of view, the sentiment among executives, future construction and consumer spending through credit are all important for a rounded view of the economy. Will this fundamentally alter the expected timing of hikes? Probably not. Can they alter the timing and pace of a recovery? Certainly. - JK