New Zealand Dollar To Pare Gains as Growth and Inflation Falter

New Zealand Dollar To Pare Gains as Growth and Inflation Falter

Fundamental Outlook For New Zealand Dollar: Neutral

- GDP contracts 0.9% in Q4, growth rate falls 1.9% from last year
- Consumer confidence weakens, foreshadowing a weakening outlook for household spending

As the New Zealand dollar heads for the biggest monthly gain against the greenback in more than 20 years, increased appetite for higher-yielding assets is likely to boost demands for the kiwi-dollar however, as the economic downturn in the global economy intensifies, deteriorating fundamentals are likely to weigh on the exchange rate as the $128B economy faces its worst recession in over a quarter century. After contracting for four consecutive quarters in 2008, the outlook for growth and inflation remains bleak as households and businesses turn increasingly pessimistic towards the economy, and conditions are likely to get worse in the months ahead as trade conditions deteriorate. The International Monetary Fund (IMF) said that they expect economic activity within the region to contract 2.0% in 2009 as private-sector spending, which accounts for nearly 60% of the economy, falters, and the Reserve Bank of New Zealand is widely expected to lower the benchmark interest further next month in an effort to steer the isle-nation out of a deepening recession.

The kiwi was the best performing of the G10 currencies this week as it gained nearly 3% against the U.S. dollar, and may continue to strengthen against its major counterparts over the following week as investors seek out higher risk/reward investments. As policy makers throughout the globe take unprecedented steps to restore confidence in the financial markets, increased appetite for risk would continue to bolster the higher-yielding currency, and as RBNZ Governor Alan Bollard reinforces his expectations for an economic recovery in the second half of the year, long-term expectations for higher interest rates could also pave the way for a rally next week. Nevertheless, after lowering growth forecasts for New Zealand, the IMF said that the nation’s high level of short-term foreign debt is a ‘key vulnerability’ for the region, and argued that ‘there is very limited scope for additional fiscal stimulus beyond the sizeable stimulus already in the pipeline.’ As a result, the fund went onto say that the RBNZ should continue to ease policy further as the government attempts to jump-start the economy, and added that the board should also consider to adopt unconventional tools, such as quantitative easing, as the ‘uncertainties surround the depth and duration of the global recession’ remains high. Meanwhile, a Bloomberg News survey shows that economists forecast the New Zealand central bank to lower the cash rate by another 25-50bps at the next policy meeting in April, and as the economic calendar for the following week is expected to show a weakening outlook for growth and inflation, fundamental headwinds are likely to weigh on the exchange rate, which could keep the kiwi-dollar in a broad range over the near-term. - DS