New Zealand Dollar At Risk As Outlook For Global Trade Falters

Fundamental Forecast for New Zealand Dollar: Bearish

• NZDUSD: Stay Short Ahead of Bounce
• New Zealand Dollar: Bigger Reaction to RBNZ Rate Decision Still to Come

The New Zealand dollar pared the decline from earlier this week, with the exchange rate rallying to a high of 0.7454 on Friday, but the rebound in the high-yielding currency could be short-lived as the devastating earthquake in the Asia/Pacific region dampens the prospects for global trade. In turn, the Reserve Bank of New Zealand may continue to scale back its outlook for future growth, and the central bank may look to ease monetary policy further over the coming months in an effort to stem the risk for a double-dip recession.

After lowering the benchmark interest rate by 50bp to 2.50% in March, RBNZ Governor Alan Bollard implied that the larger-than-expected cut was a onetime deal, and said that the rebuilding efforts from the Christchurch earthquake will add 2.5% to GDP in 2012. However, the central bank head warned that the economy will be “quite weak” in the first-half of 2011 as the natural disaster disrupts the recovery, and went onto say that growth will be flatter in the second-half of the year as households continue to be “very cautious.” As a result, Mr. Bollard stated that borrowing costs will stay pat until the reconstruction phase gets underway, but noted that rising oil prices could spur a shift in the outlook for growth and inflation as households increase their rate of savings. The destructive earthquake off the cost of Japan could further impede on the outlook for future growth as the expansion in global trade cools, and the central bank may take additional steps to stimulate the real economy as it aims to encourage a sustainable recovery.

The NZD/USD may reverse course over the following week as the sharp rebound in the exchange rate tapers off ahead of the 20-Day SMA at 0.7473, and the exchange rate may work its way back towards 0.7300 as it continues to trade within the downward trending channel from back in February. As the economic docket remains fairly light for the following week, market sentiment is likely to dictate price action for the New Zealand dollar in the week ahead, and the uncertainties surrounding the global economy could further dampen demands for the high-yielding currency as investors scale back their appetite risk.