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New Zealand Dollar At Risk For Near-Term Correction

New Zealand Dollar At Risk For Near-Term Correction

2011-03-25 21:39:00
David Song, Currency Strategist
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New_Zealand_Dollar_At_Risk_For_Near-Term_Correction_body_Picture_1.png, New Zealand Dollar At Risk For Near-Term Correction

New Zealand Dollar At Risk For Near-Term Correction

Fundamental Forecast for New Zealand Dollar: Bearish

The sharp rally in the New Zealand dollar may gather pace over the following week as the economic docket is expected reinforce an improved outlook for the region, but a shift in market sentiment could spur a near-term correction in the exchange rate as risk trends continue to dictate price action in the currency market.

New Zealand’s trade surplus is expected to widen to 270M in February from 11M in the previous month, and the improvement in the terms of trade could spark a bullish reaction in the high-yielding currency as policy makers aim to encourage an export-led recovery. As the NZD/USD rallies to a fresh monthly high of 0.7575, the kiwi-dollar may continue to retrace the selloff from back in February, and the high-yielding currency may make a run at 0.7700 in the following week as the Reserve Bank of New Zealand holds an enhanced outlook for future growth.

After narrowing escaping a recession in 2010, RBNZ Governor Alan Bollard said the rebuilding efforts from the Christchurch earthquake could boost GDP by 2.5 percent in the following year, but warned that a marked expansion in economic activity could have a bottlenecking effect as policy makers expect to see a big surge in construction. As the central bank sees a strong recovery in 2012, interest rate expectations are likely to gather pace going into the second-half of the year, and speculation for higher borrowing costs should help to prop up the high-yielding currency as investors weigh the prospects for future policy. According to Credit Suisse overnight index swaps, investors are pricing the cash rate to increase by nearly 50bp over the next 12 months, and speculation for higher borrowing costs are likely to materialize going forward as the central bank turns increasingly optimistic towards future growth. However, the rebound in risk appetite is likely to be short-lived as uncertainties surrounding the global economy continue to bear down on market sentiment, and we may see a near-term correction unfold in the week ahead following the longest stretch of advances since December. - DS

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