The downturn in the global financial market paired with mounting growth concerns for the entire world has certainly taken a toll on the New Zealand dollar as investors limit their temperament for high-yielding assets. In fact, the kiwi has lost 600+ points against the U.S. dollar this week as the flight to safety continues amid falling commodity prices.
New Zealand Dollar Outlook Bearish As The Flight to Safety Continues
Fundamental Outlook For New Zealand Dollar: Bearish
- Fading Demands for Carry Trades to Drag on the New Zealand dollar - Interest Rate Expectations Deteriorate Further, Fueling Bearish Sentiment for the Kiwi
The New Zealand dollar has fallen drastically against the greenback and the Japanese yen as the financial crisis intensified despite the increased efforts by central banks all over the world. Heightened credit concerns paired with fading demands for carry-trades will continue to drag on the high-yielding currency as lenders continue to hoard cash. Indeed we saw stock market indices around the globe break below key support levels this week, and the markets may only get worse next week as credit conditions have yet to return to normal. Meanwhile, the Reuters/Jefferies CRB Index showed that commodity prices have fallen 11.8% in September, which is the steepest monthly decline since record keeping began in 1956, signaling that lower prices will continue to limit the appeal of the New Zealand dollar. Furthermore, the remarkable slowdown in the global economy, as well as within the domestic economy, has certainly raised fears that economic activity will remain subdued well into the next year, with economists projecting the Reserve Bank of New Zealand to loosen its policy considerably in order to pull the nation out of its first recession since 1998.
The Credit Suisse overnight index swap for the RBNZ are showing that market participants are now anticipating the central bank to lower the benchmark interest rate by at least 200bp points over the next 12 months, which is significantly higher than last week’s projection for 150bp worth of cuts. Interest rate expectations have clearly deteriorated over the past week, and will continue to press on the New Zealand dollar going forward.- DS