nzd fundamentals

As investors remain risk adverse, the New Zealand dollar should continue to hold its bearish trend next week as the economic docket is expected to show a deepening downturn in the economy however, as the G-7 is scheduled to meet over the weekend, efforts to mitigate the downside risks for global growth could help to spark a rise in risk appetite. Nevertheless, skepticism about the U.S. bank bailout package paired with expectations for a rate cut by the Reserve Bank of New Zealand is likely to hamper the appeal of the higher-yielding currency, which could weigh on the exchange rate over the near-term.

The fundamental calendar for the following week is expected to show a considerable drop in producer prices as a result of lower commodity prices, and as the outlook for inflation deteriorates, the RBNZ is widely expected to ease policy further as policy makers maintain their dual mandate to ensure price stability while fostering economic growth. A Bloomberg News survey shows that economists forecast Governor Alan Bollard and Co. to lower the cash rate between 50-100bp next month as the central bank aims to steer the $128B economy out of a recession, while Credit Suisse overnight index swaps foreshadows a weakening outlook for interest rates as market participants expect policy makers to cut by nearly 100bp over the next 12 months. Amid expectations for another round of aggressive rate cuts, Dr. Bollard explicitly stated that he “would expect any further reductions to be smaller than those seen recently’ after delivering a 150bp cut last month, which suggests that the central bank may continue its easing cycle, but at a slower pace, as the International Monetary Fund forecasts a global recession for 2009. Despite the extraordinary efforts taken on by the New Zealand government, the kiwi slipped to a seven-year low of 0.4961 against the greenback earlier this month, and as the reserve currency continues to benefit from safe-haven flows, the exchange rate may continue to fall lower as investors continue to curb their appetite for risky assets. - DS