New Zealand Dollar To Test October Lows As Carry Demand Stalls

New Zealand Dollar To Test October Lows As Carry Demand Stalls

Fundamental Outlook For New Zealand Dollar: Bearish

- Retail spending in New Zealand Contracts for Third Consecutive Quarter
- Dour Fundamentals Forecasts Ongoing Weakness in Carry Trades

The New Zealand dollar fell against the greenback for three consecutive sessions this week, and may fall back towards the October lows next week as investors continue to curb their appetite for risk. Tightening demands for carry trades paired with lower commodity prices favors a bearish outlook for the New Zealand dollar, and the kiwi is likely to face increased selling pressures over the coming week as fears of a global recession intensify. Falling commodity prices dragged the Jefferies/Reuters CRB index to its lowest level since 2003, and slowing demands from the global economy suggests that prices will continue to fall lower, which would only stoke increased selling pressures for the commodity bloc over the near-term.

The event risks scheduled for the following week will also play an key role in driving price action for the high-yielding currency as deteriorating fundamentals continues to spur bets that the Reserve Bank of New Zealand will aggressively cut borrowing costs well into the next year in order to avoid a deep and severe recession. RBNZ Governor Alan Bollard reiterated this week that New Zealand is in a ‘period of slow growth,’ and went on to say that household consumption is likely to deteriorate over the coming months as growth prospects deteriorate. Dr. Bollard noted that the government may establish a fiscal stimulus package in order to ‘stabilize the economy throughout the downturn,’ which suggests that policymakers are looking to increase their efforts as the downside risks to growth intensify. Moreover, Credit Suisse overnight index swaps continues to reflect a bearish outlook for the New Zealand dollar as market participants raised bets that the RBNZ will lower the benchmark interest rate by at least 175bp over the next 12 months amid expectations for 150bp worth of projected cuts last week.

Meanwhile, the G20 Summit in Washington D.C. scheduled for the weakened could stoke increased volatility in the currency market next week as global leaders meet to respond to the financial crisis, and may help to ease fears of a global meltdown. However, the absence of President-elect Barack Obama suggests that the group is less likely to agree on any long-term commitments at the meeting, and may not reach a sound solution until Senator Obama comes into office next year. As a result, the event may fail to spark volatility in the currency market as the fundamental outlook for the global economy turns increasingly bleak. - DS