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New Zealand Dollar Faces An Even Broader Range As Risk Falters

New Zealand Dollar Faces An Even Broader Range As Risk Falters

2011-05-14 00:14:00
David Song, Currency Strategist
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new_zealand_dollar_body_Picture_4.png, New Zealand Dollar Faces An Even Broader Range As Risk Falters

New Zealand Dollar Faces An Even Broader Range As Risk Falters

Fundamental Forecast for New Zealand Dollar: Bearish

New Zealand Dollar Under Greater Pressure after RBNZ’s Bollard Agrees with IMF

New Zealand Dollar Slides after the IMF Assesses Kiwi Up to 20 Percent Overpriced

NZDUSD: Short Setup Eyed Near 0.7980

Comm Bloc Anchored to Stock Performance

The New Zealand dollar struggle to hold its ground as currency traders scaled back their appetite for yields, and the NZD/USD could face additional selling pressures over the near-term as the central bank maintains a cautious tone for the real economy. Reserve Bank of New Zealand Governor said that the aftermath of the Christchurch earthquake could cost as much as 8 percent of GDP while delivering the central bank’s financial stability report in front of a parliamentary hearing, and noted that the local currency remains ‘undesirably high’ as policy makers aim to encourage an export-led recovery.

In turn, the central bank head said that the benchmark interest rate will be held down until the downside risks for the real economy pass, and argued that monetary policy remains appropriate as the natural disaster disrupts the recovery. Despite the dovish rhetoric, market participants see the cash rate inevitability increasingly by 50bp over the next 12-months according to Credit Suisse overnight index swaps, and it seems as though investors are expecting Mr. Bollard to change his tune in the second-half of the year as he expects the economy to benefit from the rebuilding efforts. However, as the central bank head places a 5-year timeline for the reconstruction, the RBNZ may continue to talk down speculation for higher borrowing costs and the economic developments due out in the following week could dampen expectations for a rate hike later this year as growth and inflation flow.

The NZD/USD could fail to hold above 0.7800 in the coming days should we see a slower pace of service-based activity paired with a dismal consumer confidence report, and the exchange rate may revert back to the broad range from earlier this year as the economic recovery in New Zealand deteriorates. At the same time, currency traders may show a muted reaction to producer prices as the RBNZ expects inflation to track “comfortably” within the 1-3 percent target range, and another bout of risk aversion will certainly weigh on the high-yielding currency as market sentiment continues to dictate price action in the foreign exchange market. - DS

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