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New Zealand Dollar Finds Support, Range-Bound Price Action Ahead

New Zealand Dollar Finds Support, Range-Bound Price Action Ahead

2011-02-19 07:43:00
David Song, Currency Strategist
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New_Zealand_Dollar_Finds_Support_body_Picture_4.png, New Zealand Dollar Finds Support, Range-Bound Price Action Ahead

New Zealand Dollar Finds Support, Range-Bound Price Action Ahead

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand dollar pared the decline from earlier this month and the rebound in the NZD/USD may gather pace going into the end of February as the exchange rate bounces off of 0.7500, the 78.6% Fibonacci retracement of the 2008 high to low. In turn, the kiwi-dollar should maintain the range from earlier this month, and currency traders may find opportunities to take advantage of the sideways price action in the kiwi-dollar as the pair remains confined within a 300pip range.

However, as the region faces a risk for a double-dip recession, the economic developments scheduled for the following week could disappoint and spark a bearish reaction in the New Zealand dollar as investors scale back speculation for another round of monetary tightening. As growth and inflation cools, the Reserve Bank of New Zealand is likely to maintain a wait-and-see approach throughout the first-half of the year, and interest rate expectations may continue to deteriorate in the month ahead as the central bank expects inflation to “comfortably” hold within the 1 to 3 percent target range over the medium-term. According to Credit Suisse overnight index swaps, investors now see the cash rate rising 25bp over the next 12-months amid earlier projections for at least a 50bp rise in borrowing costs, and the downturn in rate expectations could intensify going forward as the central bank pledges to “modestly” tighten monetary policy over the next two-years.

As a result, the near-term rally in the NZD/USD could be short-lived if the economic releases for the following week miss market expectations, and the exchange rate may fall back towards 0.7500 as the recovery in New Zealand tapers off. However, as risk trends continues to dictate price action in the foreign exchange market, a rise in market sentiment could prop up the higher-yielding currency, and the kiwi-dollar may continue to retrace the decline from earlier this month if appetite for yields firm up in the days ahead. - DS

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