New Zealand Dollar at Clear Risk Ahead of US Labor Data

New Zealand Dollar at Clear Risk Ahead of US Labor Data

Fundamental Forecast for New Zealand Dollar: Bearish

• Soft New Zealand inflation expectations limit outlook for higher interest rates
• Forex futures and options positioning data points mixed picture for New Zealand Dollar

The New Zealand dollar recovered from early-week losses to finish marginally higher against the US Dollar to round out the past week of trade. An uneventful economic calendar meant that the risk-sensitive NZDUSD traded mostly off of moves in the US S&P 500 and similar barometers of risk sentiment, and a similarly choppy week for equity markets produced sympathetic moves in US Dollar currency pairs. The coming week promises relatively little in the way of New Zealand economic event risk, but a US economic calendar full of market-moving releases could make for considerably more eventful price action.

Whether or not the New Zealand Dollar breaks out of its recently-choppy range against the USD may very well depend on a number of top-tier economic releases out of the world’s largest economy. The infamous US Nonfarm Payrolls report could have an especially large impact on markets given uncertainty surrounding the future of US Federal Reserve monetary policy. A steady trend of underwhelming US economic data has led markets to speculate that the central bank may once again enact aggressive Quantitative Easing measures to bolster growth. Any such action would likely prove quite US Dollar-bearish and could improve financial market risk sentiment. The combination could send the NZDUSD considerably higher, and as such it will be very important to watch upcoming US labor data.

NZD traders should likewise watch for any especially large surprises out of New Zealand Trade Balance and NBNZ business confidence readings. Analysts and traders alike have aggressively downgraded forecasts of Reserve Bank of New Zealand interest rate hikes, and the NZD has suffered somewhat as a result. Overnight Index Swaps previously showed expectations that the RBNZ’s Overnight Cash Rate could reach close to 4 percent by the second half of 2011. Those same OIS curves now show much more modest expectations of rates near 3.5 percent through the same period, and the probability of a RBNZ rate hike at their next meeting has dropped substantially.

Though US interest rate expectations are especially depressed, the New Zealand Dollar has historically shown itself to be very sensitive to yield differentials against major counterparts. As such, continued downgrades of NZ yield outlooks could put further downward pressure on the NZD and we accordingly remain bearish on a medium-to-long-term basis. The shorter-term will likely be dominated by moves in the S&P 500 and similar, and the coming week of price action could prove significant in setting medium-term trends for broader markets. – DR