New Zealand Dollar Suffers a Potentially Fatal Blow on Risk Collapse

On the other hand, even if sentiment stabilizes and the appetite for yield starts to leak back into the system, the New Zealand dollar struggle to keep pace with many of its peers. Just this past week, the market’s perception of the economy and currency’s health was shaken by a surprise jump in the unemployment rate. According to the government’s data, the percentage of jobless in the nation surged to a 10-year high of 7.3 percent – well beyond the 6.8 percent figure forecasted. From an economic standpoint, this lowers the expected contribution that consumers will make towards domestic growth. Furthermore, for traders, this means RBNZ Governor Bollard will be more hesitant to move on interest rates for fear of stalling a nascent recovery. Indeed, inflation is only at 2.0 percent; so the need for hikes by the middle of this year (as he has suggested at the last policy meeting) is diminished. Without the support of a higher yield, the risks seem far greater.

Forecasting the meanderings of risk appetite next week is highly speculative; but there are signposts. The general pace of sentiment will be defined by the persistence of mitigation of concerns over systemic risks in the financial markets. Just a few months ago, the top concern was Dubai World and now it is the stability of the European Union. Considering the complexity of the situation in the euro region along with its importance in the global economy; this threat can exist for some time to come. What’s more, as fear breeds fear, the market will find other reasons to doubt the health of financial markets. Back in New Zealand, the economic docket can lead to short-term volatility and adjustments to the currency’s standing on the risk spectrum. Fourth quarter retail sales, credit health, home sales and business activity will offer a relatively complete view of economic health and almost certainly fine tune the potential for interest rate hikes. - JK