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New Zealand Dollar to Get Slight Bounce from Risk Appetite

New Zealand Dollar to Get Slight Bounce from Risk Appetite

2010-05-21 21:52:00
Michael Wright, Currency Analyst
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 TOF-10-05-21-09

Fundamental Forecast for New Zealand Dollar: Neutral

- New Zealand Dollar Soars as Budget Reveals Plans to Cut Foreign Debt
- Technical outlook points to potential New Zealand Dollar declines should the pair Rally

The New Zealand dollar has continued its southern journey, ending the week down some four percent against the U.S. dollar and finishing as the second-worst performing G-10 currencies through Friday’s close. However, a busy week of event risk had little effect on the high-yielding currency, and it seems that the risk-sensitive NZD largely fell off similar pull backs in the S&P 500 despite what seemed to be a positive calendar for New Zealand.

The economic docket in New Zealand this past week showed that producer prices rose for the third time in the past five quarters, while annual immigration growth slowed as the number of permanent migrant arrivals exceeded departures by 19,954. Meanwhile, credit card spending in April extended a five month advance, whereas, consumer sentiment pushed higher for a third straight month in May, adding signs that low rates will hold up demand and employment. In the week ahead, NZD traders will be focus on the two year inflation expectation, and the trade balance which is expected to narrow to 410M for the month of April from 567.0 in March. Building permits are also tap and is likely to provide us with an idea as to how the housing market is stabilizing. Going forward, investors are pricing in a fifty two percent chance that the Reserve Bank of New Zealand will raise rates twenty five basis points at its next rate decision meeting on June 9th, according to the Credit Suisse Overnight Index swaps. On the contrary, we may see the central bank refrain from raising its key overnight lending rate due to the fact that the country is an external debator, making New Zealand defenseless against any renewed fears of the European debt crisis.

Nonetheless, during the RBNZ’s financial stability report, Reserve Bank Governor Alan Bollard said that there is clearly a risk of further turbulence if adequate progress is not made,” and went onto add he thinks “banks have the capacity to meet increase in demand for credit and doing so will be important to sustain the economic recovery.” Additionally, Bollard stated the financial system has improved over recent months, reflecting a recovery in the New Zealand economy which is driven by stronger trading partner activity. Despite the overall positive comments from Governor Bollard, the Kiwi dollar may continue face increased selling pressure if the European debt crisis continues to linger and fuel risk aversion.

Also worth mentioning is the likelihood that China may increase interest rates amid rising inflation. China is one of New Zealand’s key trading partners, and in turn, a rise in borrowing costs from the world’s second largest country will taper exports and growth in New Zealand. With regards to price action, the pair has recovered from a five day decline and now looks poised to break above pivot resistance of 0.6821 in the short term as the pair has recently rebounded from oversold territories. However, it is noteworthy that the recent break below the 200-day SMA and lingering European debt crisis will likely cause the NZD/USD to push lower in the medium term. -MW

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