New Zealand Dollar To Weaken As Interest Rate Outlook Plunges

New Zealand Dollar To Weaken As Interest Rate Outlook Plunges

Fundamental Outlook For New Zealand Dollar: Bearish

- New Zealand Dollar Technicals Projects Further Declines
- Carry Demands Falter on Risk Aversion

The New Zealand dollar slipped to a six-year low against the greenback as commodity prices tumbled lower this week, and may fall further over the following week as risk aversion continues to drive price action in the currency market. Fears of a global recession paired with fading demands for high-yielding assets has clearly dragged on the NZDUSD, and the break below the 10/27 low of 0.5350 indicates that the pair has yet to find a bottom, and may test the 0.5000 level for psychological support over the near-term as investors hold a bearish outlook for the commodity currencies.

As credit conditions remain far from normal, fears of a protracted downturn in the $128B economy has already raised bets that the Reserve Bank of New Zealand will once again lower borrowing costs at the December 3rd policy meeting. A Bloomberg News survey showed that 11 of the 14 economists polled expect the central bank to cut the benchmark interest rate by 100bp to 5.50% from 6.50%, while the remaining forecasts recognize a chance for a 150bp rate cut to bring the target rate down to 5.00%. Moreover, Credit Suisse overnight index swaps are showing that market participants anticipate the RBNZ to cut at least 225bp over the next 12 months, which has risen from an initial estimate of 175bp from the previous week. The downturn in the interest rate outlook suggests that investors remain bearish against the New Zealand dollar, and may lead Governor Alan Bollard to lower borrowing costs well into the next year in order to stave-off further downturns in the economy.

Meanwhile, the Asia-Pacific Economic Cooperation (APEC) forum is scheduled to meet over the weekend, and may spur volatility in the forex market next week as global leaders convene to discuss the developments from the G20 meeting last week. The group will also focus on expanding trade agreements to restore economic activity, and may reach a short-term solution to stem further shocks to the global economy. However, despite the extraordinary efforts taken on by policymakers all over the globe, financial uncertainties paired with deteriorating fundamentals continues to weigh on investors, which suggests that risk trends will remain the dominant theme across the market over the foreseeable future. - DS