Rebound in Sentiment to Challenge Kiwi Record Highs- Traders Eye CPI

Rebound in Sentiment to Challenge Kiwi Record Highs- Traders Eye CPI

Fundamental Forecast for New Zealand Dollar: Bullish

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The kiwi advanced more than 0.85% this week hitting record highs just above 0.85-figure after data showed that growth on the isle-nation surpassed even the most optimistic estimates. Wednesday’s 1Q GDP figures bested forecasts with a print of 0.8% q/q and 1.4% y/y with both figures nearly tripling expectations. The kiwi surged on the news as rate hike expectations climbed on speculation that the Reserve Bank of New Zealand would show increased willingness to move on interest rates as the central bank sees a faster domestic recovery.

The largest risk to the kiwi’s recent rally remains to be significant swings in market sentiment as traders jettison higher-yielding growth-linked assets for the safety of the swissie, the yen, and the greenback. Although positive economic data saw the kiwi surge despite heightened risk aversion flows, rising concerns regarding a possible slowdown in Australian growth could cause some additional headwinds for the kiwi. Speculation that the RBA may have tightened too much too quickly continue to fuel bets that the central bank will move to cut interest rates with Credit Suisse overnight swaps now factoring over 50basis points in cuts for the next twelve months. As New Zealand’s largest trade partner, a slowdown in Australia is likely to weigh on the seemingly robust kiwi recovery.

Next week’s economic docket sees increased event risk mount on Sunday with the June Performance Services Index and the 2Q CPI print on tap. With growth prospects continuing to improve, investors will be closely eyeing the inflation print with consensus estimates calling for a hold of 0.8% q/q while the year on year print is expected to climb to 5.1% from a previous read of 4.5% y/y. A stronger than expected print would likely see rate hike expectations climb as the central bank would be more inclined to raise interest rates to curb inflationary pressures. Such a scenario would fuel further kiwi strength in the days ahead.

The kiwi rebounded of the 76.4% Fibonacci extension taken from June 8th 2010 and March 17th 2011 troughs at 0.8170 before breaking above the upper bound trendline of an ascending channel to test the 100% extension at the 85-handle where resistance now stands. A topside break sees topside targets at 0.8530 backed by 0.8580 and the 0.86-figure. Interim support holds at the 0.84-handle with subsequent floors seen at the 0.8360 and 0.8300. -MB