New Zealand Dollar Hits Fresh Yearly High, Correction On Tap

New Zealand Dollar Hits Fresh Yearly High, Correction On Tap

Fundamental Forecast for New Zealand Dollar: Neutral

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The New Zealand dollar rallied to a fresh yearly high of 0.7833 on Friday and the exchange rate may continue to trend higher over the following week as policy makers curb speculation for another rate cut. In addition, demands for the kiwi may gather pace in the days ahead as currency traders increase their appetite for yields, and the ‘risk-on’ environment could lead the NZD/USD to retrace the decline from back in November as market sentiment continues to dictate price action in the foreign exchange market.

New Zealand Finance Minister Bill English said additional monetary support was no longer “needed” as he expect the reconstruction efforts in Christchurch to boost business confidence, and went onto say that the fundamental “outlook is pretty good” as the region recovers from the worst earthquake in 80 years. However, Mr. English took note of the rise in the national savings rate, and households may scale back on consumption throughout 2011 as the region copes with the aftermath of the natural disaster.

After delivering a 50bp rate cut in March, market participants see the Reserve Bank of New Zealand raising the benchmark interest rate back to 3.00% over the next 12-months, and speculation for higher borrowing costs should help to prop up the high-yielding currency as Governor Alan Bollard pledges to normalize monetary policy “once the rebuilding phase materializes.” However, as Mr. Bollard expects economic activity to remain “quite weak throughout the first half of the year,” the risk for a double-dip recession could force the RBNZ to lower borrowing costs further over the coming months, and the central bank head is likely to retain a dovish tone for monetary policy as the quake is expected to reduce the growth rate by 0.6 percentage points in the first-quarter. At the same time, China’s efforts to contain the risk for inflation is likely to dampen the prospects for global trade as the People’s Bank of China raises its key rate for the fourth time since October, and the RBNZ may take additional steps to shore up the real economy as the fundamental outlook remains clouded with high uncertainty. As the sharp rebound in the NZD/USD remains overbought, we should see a near-term correction unfold once the relative strengthen index crosses back below 70, and the exchange rate may threaten the tight upward trending channel carried over from March private sector activity in New Zealand deteriorates. - DS