nzd fundamentals

New Zealand Dollar Under Pressure As RBNZ Hints At Further Rate Cuts

Saturday, 06 December 2008 04:17:47 GMT  |  David Song, Currency Analyst

The New Zealand dollar pared gains from the previous week as investors continued to curb their appetite for risk, and the higher-yielding currency may face increased selling pressures over the coming week as demands for carry trades deteriorate. In addition, the interest rate outlook for the Reserve Bank of New Zealand continues to favor a bearish outlook for the kiwi as investors expected the central bank to lower borrowing costs further as the $128B economy faces its worst recession in 18 years.

 

 New Zealand Dollar Under Pressure As RBNZ Hints At Further Rate Cuts

Fundamental Outlook For New Zealand Dollar: Bearish

- Reserve Bank of New ZealandCuts 150bp to 5.00% from 6.50%
- Investors Remain Risk Averse, Limiting Demands for Carry Trades

The New Zealand dollar pared gains from the previous week as investors continued to curb their appetite for risk, and the higher-yielding currency may face increased selling pressures over the coming week as demands for carry trades deteriorate. In addition, the interest rate outlook for the Reserve Bank of New Zealand continues to favor a bearish outlook for the kiwi as investors expected the central bank to lower borrowing costs further as the $128B economy faces its worst recession in 18 years.

RBNZ Governor Alan Bollard stated that additional rate cuts ‘may be warranted’ even after lowering borrowing costs at a record pace during the December 3rd policy meeting as the central bank forecasts the economy to contract 0.2% within the first half of the next year. Credit Suisse overnight index swaps are showing that investors expect the RBNZ to cut the benchmark interest rate by another 100bp over the next 12 months, which will certainly weigh on the currency going forward. Moreover, falling commodity prices paired with risk aversion could also spark increased selling pressures for the kiwi over the trading week, which could drag the NZDUSD to the 11/20 low of 0.5196 over the near-term.

Meanwhile, the fundamental event risks scheduled for the following week also favors a bearish outlook for the kiwi as trade conditions are expected to deteriorate further for the export-driven economy. The terms of trade index is anticipated to contract 2.6% from the second quarter, which would be the biggest drop since 2005, and reflects the dire state of the global economy. Weakening demands from around the world would only heighten the downside risks for growth, and may trigger a sell off in the New Zealand dollar as market participants price-in a worsening outlook for the economy. - DS

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