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New Zealand Dollar Outlook Remains Bearish As Growth Deteriorate

New Zealand Dollar Outlook Remains Bearish As Growth Deteriorate

2011-03-18 22:27:00
David Song, Currency Strategist
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New_Zealand_Dollar_Outlook_Remains_Bearish_As_Growth_Deteriorate_body_Picture_1.png, New Zealand Dollar Outlook Remains Bearish As Growth Deteriorate

New Zealand Dollar Outlook Remains Bearish As Growth Deteriorate

Fundamental Forecast for New Zealand Dollar: Bearish

The New Zealand dollar tumbled to a fresh yearly low of 0.7108 following the flight to safety, and the high-yielding currency may continue to lose ground over the following week as the risk for a double-dip recession intensifies. Economic activity in New Zealand may have weakened further during the last three-months of 2010 following the unexpected contraction in the third-quarter, and a dismal growth report would exacerbate the recent selloff in the exchange rate as the central bank maintains a cautious outlook for the region.

Reserve Bank of New Zealand Governor Alan Bollard warned economic activity may have contracted in the first-quarter as well after lowering the benchmark interest rate to 2.50% earlier this month, and the central bank may see scope to ease monetary policy further this year as the slew of natural disasters in the Asia/Pacific region dampens the outlook for global trade. As uncertainties surrounding the world economy continue to bear down on market sentiment, the flight to safety may gather pace over the following week, and the bearish sentiment underlying the NZD/USD could produce a test of 0.7000 as the pair searches for support. Nevertheless, investors continue to see scope for higher borrowing costs in New Zealand as Credit Suisse overnight index swaps reflects speculation for a 25bp rate hike over the next 12-months, but the increasing risk for a double-dip recession is likely to bear down on interest rate expectations as the central bank curbs its outlook for growth and inflation.

However, as the relative strength index bounces back from oversold territory, the correction in the kiwi-dollar may continue to develop going into the following week, and the exchange rate may work its way back towards the 200-Day moving average at 0.7411 before we get anther selloff in the New Zealand dollar. As a result, currency traders may come across an opportunity to fade the sharp rebound on Friday ahead of the 4Q GDP report, and the exchange rate should continue to trend lower over the near-term as investors scale back their appetite for risk. -DS

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