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New Zealand Dollar Looks to RBNZ, Risk Sentiment for Direction Cues

New Zealand Dollar Looks to RBNZ, Risk Sentiment for Direction Cues

2011-03-05 04:52:00
Ilya Spivak, Sr. Currency Strategist
Share:
New_Zealand_Dollar_Looks_to_RBNZ_Risk_Sentiment_for_Direction_Cues_body_TOF_03042011_NZD.png, New Zealand Dollar Looks to RBNZ, Risk Sentiment for Direction Cues

Fundamental Forecast for New Zealand Dollar: Mixed

Needless to say, the spotlight in the week ahead falls on the monetary policy announcement from the Reserve Bank of New Zealand, with markets heavily favoring a rate cut in the aftermath of the worst earthquake in 80 years that rocked the city of Christchurch two weeks ago. A Credit Suisse gauge of traders’ priced-in expectations puts the probability of a 25 basis point decrease in benchmark borrowing costs at 100 percent, with the chance of a larger decrease also gradually climbing through last week.

From a trading perspective, such one-sided expectations present a problem: with a rate cut broadly expected (and even publicly advocated by the prime minister), its likelihood has surely been priced into exchange rates at this point. This suggests the final outcome may disappoint the bears and yield gains for Kiwi, particularly if RBNZ Governor Alan Bollard and company are perceived as not dovish enough to justify recent NZD losses in the statement accompanying announcement. Indeed, a trade-weighted index of the currency’s average value against its top counterparts has fallen for five consecutive weeks, hinting a correction may be in the cards.

Beyond the rate decision, a strong correlation between NZDUSD and the MSCI World Stock Index suggests risk sentiment remain significant. Here, the path of least resistance favors losses as turmoil in the Middle East continues to push crude oil prices higher, threatening the global economic recovery and weighing on the spectrum of risk-geared assets. The bloody conflict in Libya has become a poster-child for the worst-case scenario of an uprising in the region after the relatively orderly transitions in Tunisia and Egypt. While the country itself is not high enough in the oil supply chain to truly derail global growth, fears of a similarly messy situation in a country like Saudi Arabia (particularly as Iran stokes Shiite-Sunni tensions) are likely to keep sentiment broadly on the defensive while reports of bloodshed continue to dominate the headlines.

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