New Zealand Dollar to Face Whipsaw Price Amid External Fears
Fundamental Forecast for Australian Dollar: Neutral
The New Zealand dollar extended last week’s southern descent, ending the week slightly lower against the U.S. dollar and finishing as the fourth-worst major currency through Friday’s close. The economic docket in the high-yielding currency this past week was relatively light as the two year inflation expectation for the second quarter rose 2.8 percent from 2.7 percent the quarter prior. Meanwhile, trade surplus widened in April amid soaring commodity prices which kept exports near record levels, while imports of crude oil and machinery tumbled lower.
In the week ahead, NZD traders will turn their focus to business confidence, and the commodity price index. Thus, with a light economic calendar, the RBNZ rate decision on tap for June 9th, and the U.S. markets closed on Monday in observance of Memorial Day, we are likely to see whipsaw price action this coming week. Indeed, investors are pricing in a sixty six percent chance that policy makers will raise rates twenty five basis points at its next rate decision, according to the Credit Suisse Overnight Index swaps. At the same time, there is a slight possibility that we may see the central bank refrain from raising rates as the country is an external debater, making New Zealand defenseless against renewed fears of the European debt crisis.
On the other hand, though it seems unlikely in the short term, it is worth noting the possibility of an increase in Chinese interest rates in the medium term as local governments and banks have been the main factors hindering at a rise in rates. 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. Nonetheless, the country’s largest vulnerability is now its large and growing net external liabilities which are expected to increase over the next five years as government debt soars from 14 percent to 21 percent this year. In regards to price action, we have seen a lackluster performance this week in the NZDUSD as the pair trades in the congested area of 0.6868 – 0.6618. Going forward, we may see the pair test 0.6500 for support, with price action likely to be capped around 0.7000 as the pair recently managed to break below the 200-day SMA. - MW
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