Recent US S&P 500 tumbles could very well set the tone for yet another year of declines, and we recently wrote that the January Effect in the S&P could push the Euro/US Dollar to further losses. In times of great financial market duress, domestic fundamentals take a backseat to specific market flows. As one of the three highest-yielding G10 currencies, the New Zealand dollar has greatly benefited from speculative flows seeking the highest return on capital. As markets retrench, however, those same speculators refuse to risk considerable currency depreciation to collect a comparatively meager interest rate differential. We subsequently have little doubt that movements in the S&P and other risk sentiment barometers will be the single greatest factor in the New Zealand Dollar’s trajectory in the coming weeks of trade.
New Zealand Dollar traders should of course keep track of domestic economic developments all the same, and the coming week’s NZ Unemployment Rate numbers could elicit sharp short-term reactions from the antipodean currency. Consensus forecasts predict that the domestic unemployment rate gained another 0.3 percentage points in the final quarter of 2009. Any noteworthy disappointments in said number could force further NZD weakness, but it is difficult to claim that any near-consensus results will have a lasting effect on the high-yielding currency. Traders should be vigilant of any and all shifts in global financial market risk sentiment. - DR
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