nzd fundamentals

New Zealand Dollar Faces Increased Selling As Investors 'Deleverage'

Saturday, 25 October 2008 02:51:02 GMT  |  David Song, Currency Analyst

The New Zealand Dollar weakened considerably against the greenback and the Japanese yen this week as mounting uncertainties for the global economy continued to lead financial institutions, as well as private investors, to unwind their positions in high-yielding assets.

 

New Zealand Dollar Faces Increased Selling As Investors ‘Deleverage’

Fundamental Outlook For New Zealand Dollar: Bearish

- Reserve Bank of New Zealand Delivers 100bp Cut, Lowering Key Rate to 6.50%
- New Zealand Inflation Spikes to 18 Year High

The New Zealand Dollar weakened considerably against the greenback and the Japanese yen this week as mounting uncertainties for the global economy continued to lead financial institutions, as well as private investors, to unwind their positions in high-yielding assets. In addition, lower commodity prices have also dampened the appeal of the comm. block, and additional declines in energy and metal may stoke further selling pressures for the kiwi.

The ‘deleveraging’ process has certainly fueled bearish sentiment for the kiwi, and the ongoing weakness in the global equities markets may continue to weigh on the New Zealand currency over the following week as the flight to safety continues. Over the past two weeks, the NZDUSD has held within a broad range between 0.5785 and 0.6425, but the recent break to the downside indicates that pair could push lower in the near-term. Many arguments have been made that the pair is heavily oversold and that a retracement is certainly overdue, but the failure to move higher suggests that traders remain bearish against the New Zealand dollar.

Meanwhile, from a fundamental stand point, the downturn in the domestic economy continues to fuel expectations for further easing by the Reserve Bank of New Zealand despite the 100bp cut to 6.50% this week. Credit Suisse overnight index swaps are showing that investors expect the RBNZ to lower the benchmark interest rate by another 100bp over the next 12 months, and as the interest rate outlook remains weak, buying pressures for the New Zealand dollar will remain subdued in the near-term. Despite the event risks scheduled for the week ahead, broad based volatility throughout the global financial market is anticipated to drive price action for the New Zealand dollar once again.  - DS

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