New Zealand Dollar Tracks Risk as Seasonal Forces Complicate Rebound

Fundamental Forecast for New Zealand Dollar: Neutral

• NZ Trade Balance Shows First Deficit in 7 Months, Business Confidence Slumps
• New Zealand Dollar Broadly Sold as Finance Firm Files for Receivership
• Options Positioning Question Bearish Implications of Build in NZD Futures

A forceful recovery in risk-taking promises gains for the New Zealand as sentiment remains the dominant catalyst of price action, with NZDUSD showing a correlation reading of 0.86 with the MSCI World Stock Index on 20-day percent change studies. However, seasonal factors may complicate the landscape and threaten a return to risk aversion.

Risk appetite staged an impressive comeback as US economic data surprised sharply to the upside throughout last week, starting with a outperformance on the consumer confidence reading, followed by an unexpected pickup in manufacturing growth, and closing out with a much stronger than expected jobs report. Equity markets responded accordingly as traders continued to look to the health of the world’s largest consumer market as the bellwether for the global recovery at large, with the MSCI World Stock Index snapping three consecutive weeks of losses to add 3.7 percent, the most in two months. The docket of US event risk pales by comparison in the week ahead, seemingly suggesting that little stands in the way established pro-risk momentum and promising continued gains for stocks and related currencies.

That said, the week ahead marks an important seasonal turning point – the US Labor Day holiday – which typically serves as the line in the sand between the “summer doldrums” period when most traders are on vacation (usually marked off starting with the US Memorial Day holiday at the end of May) and the time when they return to the markets. Equity markets crept higher to add 4.8 percent between the Memorial and Labor Day holidays this year, thoroughly outdoing the historical average of less than 1 percent over the same period, but trading volumes plunged by a hefty 31.4 percent. This seems to undermine the conviction behind recent gains, hinting at the possibility that last week’s performance may have been the last gasp of a move soon to be reversed as investors put the summer behind them, leaving the door open for renewed risk aversion to sink stocks and the Kiwi alike.