The New Zealand Dollar finished the week modestly higher against its US namesake, bolstered by a similarly tepid bounce in the US S&P 500 but weighed down by its own economic fundamentals. A NZ Retail Sales report showed the worst month-on-month decline in Core Retail Sales in 14 years. The news of week consumption and disappointing REINZ housing data only served to dampen forecasts for a broader economic recovery, and Reserve Bank of New Zealand interest rate expectations were accordingly lower. Analysts had earlier called for the New Zealand central bank to begin raising interest rates in a short few months, but the truly disappointing consumption figures suggest that the bank may yet wait longer. The net effect was New Zealand Dollar weakness against the resurgent Australian Dollar, but market dynamics could just as easily shift on flare-ups in financial market tensions.
The week ahead will likely bring further volatility for the highly risk-sensitive New Zealand currency, and a Producer Prices report threatens to force sharp short-term moves on any surprises. Recent Consumer Price Index data showed that inflation rates were roughly in-line with RBNZ targets and dampened expectations of aggressive monetary policy tightening. Forecasts are subsequently riding low on Producer Prices data, and any especially large surprises could re-kindle hopes for RBNZ rate hikes. A sizeable surprise would likely elicit strong reactions from the New Zealand Dollar.
Traders should otherwise keep a close eye on the trajectory of the US S&P 500 and other key risk barometers. We have spoken ad nauseam on the importance of financial risk sentiment as it relates to the high-yielding New Zealand dollar. Through times of relative stability, rent-seeking speculators will buy the New Zealand Dollar against lower-yielding currencies such as the Japanese Yen and US Dollar in order to collect yield differentials. The inherently risky strategy only works, however, if exchange rates are relatively stable. If markets threaten to push the New Zealand Dollar substantively lower against the USD and JPY, leveraged traders risk sizeable losses on NZD carry positions. Watch for the first signs of trouble in broader risky asset classes; sharp drops in the S&P 500 would almost-certainly be met with similar declines in the New Zealand Dollar. - DR
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