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New Zealand Dollar Vulnerable as Rate Expectations Falter

New Zealand Dollar Vulnerable as Rate Expectations Falter

2010-07-30 23:24:00
Michael Wright, Currency Analyst
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TOF730nzd_body_TOF730nzd.gif, New Zealand Dollar Vulnerable as Rate Expectations Falter

New Zealand Dollar Vulnerable as Rate Expectations Falter

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand dollar was the only G10 currency lower against the U.S. dollar this past week, tumbling some 0.47 percent, and the trend may continue going into next week’s trade as the Reserve Bank of New Zealand talked down their recent rate hike, while risk aversion looked to regain its footing. Indeed, the central bank raised its key overnight lending rate twenty five basis points to 3.00 percent as widely excepted, however, the subsequent statements was the main driver of price action.

After the RBNZ released their overnight lending rate, Governor Alan Bollard was more bearish on the economic outlook than the previous meeting as he stated that “growth had softened somewhat,” and went onto add that “the pace and extent of further OCR increases is likely to be more moderate than was projected in the June monetary policy statement.” On the contrary, the bank noted that growth is likely to expand between 3 and 3.5 percent this year, which is greater than market expectations of 2.8 percent. Indeed, we may continue to see policy makers withdraw monetary stimulus measures; however, it is likely to be at a slower pace than previously forecasted. Last week, we also saw business confidence tumble to its lowest level since July 2009, while the region posted a trade surplus of NZ$276 million in June. The trade balance is of particular importance in that it displays the demand from the external sector, with primary commodity demand from Asia and Australia. In turn, as the recovery in the global economy is expected to slow as governments scale back stimulus measures to battle budget deficits, we will likely witness exports in New Zealand weaken which will in turn weigh on business revenue and ultimately employment.

For this upcoming week, NZD traders will shift their focus to the unemployment rate for the second quarter which is forecasted to rise to 6.2 percent from 6.0 percent, while retail sales is expected to 0.5 percent for the month of June. With regards to price action, the single currency has pushed lower against the greenback to stall at the 10-day SMA. Disappointing data in New Zealand in conjuncture with risk aversion may send the NZD/USD to test the 200-day SMA. However failure to make a clear break and close below 0.7220 may lead price action to re-test the 6-month high. -MW

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