nzd fundamentals

New Zealand Dollar Fundamentals Foreshadow A Deepening Recession

Saturday, 07 February 2009 02:50:52 GMT  |  David Song, Currency Analyst

The New Zealand dollar is likely to face increased selling pressures over the following week as the economic docket is expected to show a deepening recession throughout the region. And, as market participants hold a weakening outlook for global interest rates, expectations for another round of rate cuts by the Reserve Bank of New Zealand will continue to weigh on the higher-yielding currency over the near-term. Moreover, as the flight to quality continues, safe haven flows could spark increased downward pressures on New Zealand’s exchange rate as investors remain risk adverse.

New Zealand Dollar Fundamentals Foreshadow A Deepening Recession

Fundamental Outlook For New Zealand Dollar: Bearish

- New Zealand’s unemployment rate rises to a five-year high of 4.6%
- New Zealand Dollar – US Dollar Exchange Rate Forecast

The New Zealand dollar is likely to face increased selling pressures over the following week as the economic docket is expected to show a deepening recession throughout the region. And, as market participants hold a weakening outlook for global interest rates, expectations for another round of rate cuts by the Reserve Bank of New Zealand will continue to weigh on the higher-yielding currency over the near-term. Moreover, as the flight to quality continues, safe haven flows could spark increased downward pressures on New Zealand’s exchange rate as investors remain risk adverse.

As RBNZ Governor Allan Ballard and Co. projects growth prospects to deteriorate further, the fundamental data scheduled for the following week are expected to reinforce a weakening outlook for the isle nation, and a significant fall in private demands would certainly weigh on nation’s exchange rate. Economic conditions are likely to only get worse throughout the year as the International Monetary Fund forecasts a global recession for 2009, and as a result, fading demands from home and abroad are likely to push the commodity-based economy into a deeper recession over the coming months as trade conditions falter.

Nevertheless, as policy makers pledge to steer the economy out of the recession, efforts by the government should help to mitigate the downside risks for growth, but as the industrialized economies throughout the Pacific are gripped by financial uncertainties paired with a weakening outlook for global economy, the odds for improved growth remains unlikely. As a result, Credit Suisse overnight index swaps currently show that investors expect the RBNZ to lower the official cash rate by more than 75bp over the next 12 months in an effort to stimulate the economy, while 11 economists polled by Bloomberg News forecast the central bank to cut between 50-100bp, and as market participants continue to raise bets for lower borrowing costs, the New Zealand dollar is expected to weaken further against its major currency counterparts throughout the medium-term. - DS

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