New Zealand Dollar Finally Turns to its Own Rate Forecasts

While there are key economic indicators on the docket this week; we have to be realistic about the influence that risk appetite has over the kiwi and the global financial markets. If investor sentiment sours in the days ahead and a wave of profit taking washes over the financial markets, any moderate improvements in the outlook for New Zealand interest rates will matter little to investors looking for safety and liquidity. On the other hand, if the demand for yield takes off, the nation’s comparatively high benchmark rate will buoy the currency even if the outlook for the RBNZ’s eventual hike is pushed back. Considering the level of influence this vague driver has over price action; it behooves us to define the potential catalysts for underlying sentiment. US 4Q earnings and the advanced reading of 4Q UK GDP (as a proxy for all industrialized economies) are notable releases; but it is also a strong probably that fear or greed itself could tip the scales.

In the event that risk trends maintain their stable course, there is still room for volatility and perhaps an early trend for the kiwi dollar. The benchmark lending rate for New Zealand is currently 2.50 percent. This is historically the lowest level on record and puts the yield at a notable discount to its Australian equivalent. To keep pace with any Aussie dollar strength founded through additional hawkish changes or fundamental strength, kiwi traders will have to see the potential for rate hikes from the New Zealand central bank in the near future. There are a few key indicators that can accomplish this take. At the top of this list is the fourth quarter consumer inflation data. Central bank Governor Alan Bollard has already adjusted his forecast for a hike from ‘late’ 2010 to mid-2010; but to put a more definitive time frame on this outlook, inflation will have to increase the pressure. The bank’s target is between 2 to 3 percent; so the forecast for a 2.1 percent reading is near the minimum one could expect to be hawkish. The other two remarkable releases on the docket are for home sales and consumer spending. Both are critical to domestic economic health as export income seems relatively secure at this point. - JK