New Zealand Dollar To Underperform Ahead of RBNZ Rate Decision

The RBNZ is anticipated to maintain a dovish outlook as policy makers expect inflation to hold within its target range of 1 to 3 percent, and the board is likely to maintain its pledge to “begin removing policy stimulus around the middle of 2010” as the central bank aims to encourage a sustainable recovery. During the January meeting, Mr. Bollard said households remained “cautious” as a result of the deterioration in the labor market paired with “subdued” credit growth, and noted business spending was relatively “weak” as firms kept a lid on production and employment. Nevertheless, the slew of event risk scheduled for the following week is likely to drive price action for the New Zealand dollar as investors weigh the prospects for a sustainable recovery, and a rebound in manufacturing and global trade could drive the exchange rate higher as the outlook for future growth improves. However, as risk trends continue to dictate price action in the foreign exchange market, a drop in risk appetite could stoke increased selling pressures on the NZD/USD as the greenback benefits from safe-haven flows. - DS