It may be important to watch for any especially large surprises out of early-week Producer Prices results, but the New Zealand dollar will most likely trade off of broader direction in financial markets. Recent Reserve Bank of New Zealand rhetoric suggests that the central bank is unlikely to begin raising interest rates immediately, and RBNZ governor Alan Bollard explicitly stated that interest rates were unlikely to reach heights seen in previous tightening cycles. Indeed, the head central banker took a very circumspect view of domestic economic conditions and implications for monetary policy. Overnight Index Swaps currently predict that the RBNZ will raise rates by a substantial 200 basis points in the coming 12 months, and any especially below-forecast inflation data could easily force corrections in lofty rate expectations.
Traders should otherwise keep a close eye on key financial market risk barometers such as the US S&P 500 and New Zealand’s own NZX 50. Considerable price moves in the S&P have left its highly-significant Volatility Index (VIX) near its highest levels since mid-2009. Such elevated volatility expectations make it plainly clear that market conditions remain strained, and the highly risk-sensitive New Zealand Dollar stands to lose further if the S&P continues lower through the coming week’s trade. - DR
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