Kiwi Rally Could Be Stemmed by a Dovish RBNZ

Fundamental Forecast for New Zealand Dollar: Bearish

• Kiwi Slides as New Zealand CPI Unexpectedly Falls in Fourth Quarter
• New Zealand Dollar Closes at 200 Day Average

The New Zealand Dollar had another strong week against the U.S. Dollar, posting a modest 1.56 percent gain as price action this week could be characterized as nothing more than a “slow melt up.” Still, even though the Kiwi lagged most of the majors in terms of performance, the higher yielding currency’s performance this year is nothing to shake a stick at: the Kiwi is up 3.73 percent against the Greenback in 2012, the best among the most liquidly traded currencies in the world.

It’s worth noting, before we dive into the fundamentals, where the New Zealand Dollar currently sits technically speaking. The NZD/USD finished the week trading at its 200-DMA, and in the middle segment of an ascending channel that has been in place for over a month now. Now, although the pair finished off of its weekly highs – a direct result of the disappointing inflation reading that will weigh heavily on rate expectations going forward (more on that in a moment) – a favorable Greek private sector involvement (PSI) deal could propel the pair well-above the 200-DMA and towards the top of its channel, near 0.8150, before falling back.

Digressing back to the fundamentals, one thing is clear: the New Zealand economy is starting to show signs of deflation, which will leave policymakers troubled, headed into Wednesday’s Reserve Bank of New Zealand policy meeting. According to the Credit Suisse Overnight Index Swaps, there is now a miniscule 5.0 percent change of a 25-basis point rate cut on Wednesday; but more noteworthy, the tides have turned and now basis points are being priced out of the New Zealand Dollar over the next 12-months.

While a change in the key interest rate would come as a surprise to market participants – evident by the Kiwi’s strength to start off the year – policymakers will not be ignoring the recent trend in key data points over recent months. Aside from the worse than expected inflation reading for the fourth quarter, consumer and business confidence has been declining, consumer spending is contracting, and manufacturing activity is falling. If this trend is to continue through the first quarter of the year, I would expect RBNZ officials to announce a rate cut sometime in between May and October; it all depends on global growth conditions and what other central banks do to ease monetary conditions.

Aside from this, in what could offer a lift to the Kiwi on the back of a dovish RBNZ meeting on Wednesday, trade balance figures from December are expected to show signs of improvement, which comes as no surprise given the Kiwi’s weakness headed into the last month of the year. However, with imports forecasted to have declined on a month-over-month basis, this tends to the notion that New Zealanders are slowing their consumption. Overall, between the fundamental event risk on the docket and the technical picture suggesting a major move in either direction, the coming week is crucial to the New Zealand Dollar. –CV