New Zealand Dollar To Threaten October Rebound On Contagion Fears

Fundamental Forecast for New Zealand Dollar: Bearish

• NZDUSD: Medium Term Top Set Near 0.82
• New Zealand Dollar Resisted by Former Support Line
• NZDUSD Remains Heavy on EU Concerns

The New Zealand dollar slipped to a fresh monthly low of 0.7552 following the shift in trader sentiment and the high-yielding currency may face additional headwinds over the following week should the flight to safety gather pace. Indeed, mounting fears surrounding the sovereign debt crisis weighed on investor confidence, and concerns regarding New Zealand’s current account deficit may continue to dampen the appeal of the kiwi as the heightening risk for contagion dampens risk-taking behavior.

As Reserve Bank of New Zealand Governor Alan Bollard sees the region facing higher funding costs, the ongoing run in the current account is likely to become a growing concern for the central bank, and there could be increased pressure on the government to address the gap as the global financial system remains fragile. Should the fiscal situation deteriorate further, policy makers may become increasingly reliant on the RBNZ to shore up the real economy, and we may see the central bank soften its hawkish tone for monetary policy as the fundamental outlook for the isle-nation falters. According to Credit Suisse overnight index swaps, market participants now see the RBNZ lowering the benchmark interest rate by nearly 25bp over the next 12-months, and we may see interest rate expectations weaken further as world leaders see a slowdown in global growth. As we expect the RBNZ’s 4Q inflation expectations survey to highlight a weakened outlook for price growth, the development should reinforce expectations for lower borrowing costs, and increased speculation for a rate cut is likely to exacerbate the bearish sentiment underlying the high-yielding currency as market participants weigh the prospects for future policy.

As the NZD/USD appears to have carved out a head-and-shoulders top in November, we should see the sharp reversal from 0.8240 gather pace next week, and the kiwi-dollar may threaten the rebound from 0.7471 as market participants scale back their appetite for risk. However, as the relative strength index approaches oversold territory, we may see a near-term correction in the exchange rate as long as the oscillator holds above 30. - DS