nzd fundamentals

New Zealand Dollar Outlook Remains Bearish as Risk Appetite Falters

Friday, 10 July 2009 20:11:36 GMT  |  David Song, Currency Analyst

New Zealand Dollar Outlook Remains Bearish as Risk Appetite Falters

Fundamental Outlook for New Zealand Dollar: Bearish

-    New Zealand Business Confidence Rebounds From Record-Low
-    RBNZ Calls on Commercial Banks to Lower Borrowing Costs
-    Risk Appetite/Carry Trade Weighed as Optimism Deteriorates


The New Zealand dollar continued to trend lower against the greenback, with the NZD/USD slipping below the 20-Day moving average this week to hold below 0.6300, and the pair may face increased selling pressures over the following week as investors weigh the prospects for a global recovery. Fears of a protracted downturn in the world economy continued to weigh on market sentiment, with crude oil prices marking the biggest weekly decline since January, and the drop in global commodities paired with the slide in the equities market is likely to drag the high-yielding currency lower in the week ahead as risk appetite falters. 

Meanwhile, the Reserve Bank of New Zealand stated ‘floating-rate mortgages appears unusually high over recent months,’ with policymakers calling on commercial banks to lower lending rates further as ‘unduly high interest costs could lead to the closure of businesses that may be fundamentally sound.’ The RBNZ said ‘a low-interest-rate environment is critical’ to steer the economy out of the recession, and the stickiness in borrowing costs may continue to drag on economic activity going forward as the global financial systems remains fragile. At the same time, the central bank expects growth prospects to remain subdued over the near-term as trade conditions falter, and the RBNZ went on to say ‘that it will be some significant time before economic activity returns to robust and healthy levels,’ and Governor Alan Bollard may continue to hold a dovish outlook for future policy as he expects the economic recovery to be ‘slow and drawn out.’

Nevertheless, the economic docket could foreshadow an improved outlook for the $128B economy as market participants project retail sales to rise for the second consecutive month in May, and the data could push the NZD/USD higher over the following week as investors anticipate the central bank to tighten policy over the next 12 months. Meanwhile, economists forecast consumer prices to rise 0.5% in the second quarter, which the annual rate for inflation is expected to fall to 1.8% from 3.0%, which would be the lowest reading since the first quarter of 2004, and the slump in price growth may lead the RBNZ to ease policy further over the coming months as the economic outlook remains weak. - DS
 

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