New Zealand Dollar To Be Heavily Influenced By RBNZ Rate Decision

New Zealand Dollar To Be Heavily Influenced By RBNZ Rate Decision

Fundamental Forecast for New Zealand Dollar: Neutral

• New Zealand consumer confidence unchanged as economy recovers from February earthquake
• First quarter CPI figures advanced; but not enough to feed RBNZ rate speculation
• The kiwi refrains from a meaningful pullback to the dollar while it hits new lows against the Aussie

The New Zealand dollar broke above 0.8000 for the first time since 2008 as currency traders increased their appetite for yields, and the exchange rate may continue to push steadily higher going into the final week of April as it maintains the upward trend carried over from the previous month. At the same time, the Reserve Bank of New Zealand interest rate decision could further instill a bullish outlook for the high-yielding currency as the central bank expects the rebuilding efforts from the Christchurch earthquake to boost economic activity throughout the region, and the central bank may see scope to tighten monetary policy in the second-half of the year as the economy skirts a double-dip recession.

Although the RBNZ is widely expected to maintain the benchmark interest rate at 2.50% in April after lowering borrowing costs for the first time since April 2009, the policy statement accompanying the rate decision is likely to spark increased volatility in the exchange rate, and the central bank may hold a positive tone for future growth following the faster-than-expected pace of economic expansion in the fourth quarter. According to Credit Suisse overnight index swaps, investors speculate borrowing costs in New Zealand to increase by more than 50bp over the next 12-months, and interest rate expectations may gather pace going forward if we see the central bank raise its economic assessment for the region. However, as the 1Q consumer price report dampens the risk for inflation, RBNZ Governor Alan Bollard may adopt a dovish tone for future policy, and a drawn down in interest rate expectations could lead the NZD/USD to break out of the upward trend as the near-term rally remains overbought. In turn, comments from the central bank could produce a near-term correction in the exchange rate, and the kiwi-dollar may fall back towards former resistance around 0.7800, which should act as support going forward.

Nevertheless, as the economic docket for the following week is expected to show New Zealand’s trade surplus widen to 200B in March from 194M in the previous month, the rise in foreign trade is likely to instill an improved outlook for the economy, and the data could reinforce the bullish sentiment underlying the high-yielding currency as the export-led recovery gathers pace. However, as risk trends continues to dictate price action in the foreign exchange market, a shift in market sentiment could weigh on the exchange rate, and the New Zealand dollar may struggle to hold its around should investors scale back their appetite for yields. - DS