New Zealand Dollar Awaits Guidance of Risk Trends, Yield Speculation

New Zealand Dollar Awaits Guidance of Risk Trends, Yield Speculation

Fundamental Forecast for New Zealand Dollar: Neutral

• RBNZ holds its benchmark rate, says recovery slower than expected but hikes still in the future
• NZDUSD puts in for a tell-tale double top and evening star, is this a precursor to reversal?

The New Zealand dollar was exceptionally strong into the end of this past week. This was quite the feat considering there was nothing on New Zealand’s economic docket and the risk appetite trends were sedate through the final 24 hours of trade. Is this burst of life a signal of performance heading into the coming week? As it stands, the commodity currency was in or on the verge of significant price developments when liquidity was drained. Perhaps the most remarkable sign of tension was NZDUSD’s retest of a two-plus-year double top at 0.7650. Yet that isn’t the only kiwi-pair ready for action. AUDNZD has plunged more than 400 points this past week; EURNZD dropped to a five-week low; and NZDJPY has pushed back against the remarkably strong Japanese yen. This is exceptionally remarkable when we consider the New Zealand benchmark is lower than its Australian counterpart, growth forecasts have waned and demand for yield has leaned more towards emerging markets than it has sovereign debt (even high-yield sovereign debt).

In the world of trading, where everything is based on probabilities and the potential for return, ‘unusual’ and ‘remarkable’ should trigger caution. The New Zealand dollar is not the Japanese yen or US dollar. We need some material reason to believe that the kiwi can break meaningful resistance and carry an aggressive rally through. On its own, there is little to do that. The primary appeal of this particular currency is high yields and the possibility of higher yields down the line. RBNZ Governor Alan Bollard modestly stepped up his hawkish commentary; but his remarkable transparency wouldn’t hint at anything resembling a near-term hike. We could get around this fact if there were likely to be a surge in general risk appetite in the near future. There is a scenario for that in an expansion of stimulus efforts by the FOMC, Bank of Japan and perhaps Bank of England. However, that is perhaps over-reaching a speculative forecast. It would be too easy to disappoint. Besides, an expansive taste for risk would theoretically benefit the Aussie dollar more as it has the higher yields and greater probability of further hikes.

Given the New Zealand dollar’s standout strength and incredible performance against the star performer Aussie dollar, it is most likely the case that speculators are solely responsible for driving it higher. Speculative interest holds powerful sway over the markets; but it is also highly unstable without a meaningful fundamental handle for the masses to hold onto. For that reason, we should watch out for a sharp reversal from the kiwi if a broader risk appetite bid doesn’t develop out of the Fed’s rate decision. In the meantime, we should also take in the 3Q employment data scheduled for release as a long-term assessment of growth and rate expectations, as well as the short-term implications for volatility. -JK