New Zealand Dollar to Extend Gains on Well-Supported Risk Appetite

Fundamental Forecast for New Zealand Dollar: Bullish

• New Zealand Trade Surplus Narrows as Imports Soar
• NZ Dollar Slumps as Business Confidence Tumbles
• Technical Setup Hints NZ Dollar Setback Overdue

The New Zealand Dollar outperformed last week, rising against all of its major counterparts. A still-strong correlation between NZDUSD and the underlying sentiment trends (as tracked by the MSCI World Stock Index) point toward continued gains as risk appetite looks likely to continue pressing higher.

A noticeably hawkish turn in Federal Reserve rhetoric coupled with seemingly supportive fundamentals following an undeniably robust employment report in March has underpinned hopes of firming recovery in the world’s top economy, translating into a more optimistic outlook for global growth at large. Judging by last week’s chatter from Fed policymakers, more of the same is likely on tap as the central bank releases minutes from the last meeting of the rate-setting FOMC committee while a long list of its decision-makers take to the wires again.

With that in mind, the landscape is not without risks. Oil prices continue to march higher as the crisis in the Middle East stokes supply worries and Japan’s nuclear fiasco seems to be taking a turn for the worse. Furthermore, although markets shrugged off host of negative developments out of the Euro Zone last week as traders focused on the upcoming rate hike from the ECB, a “buy the rumor, sell the fact” scenario seems plausible as the blinders come off once speculation of imminent tightening is validated, opening the door for sovereign risk to rear its ugly head once more.

With that in mind, Euro sellers may bide their time until the outcome of a EU finance ministers’ meeting in Budapest is revealed over the weekend, while the steady stream of supportive Fed-speak keeps the focus on Bernanke and company and off arguably familiar (and to some extent, priced in) headwinds emanating from Fukushima and Tripoli.