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Kiwi’s Run in Question as Markets Weigh Risk Tolerance

Kiwi’s Run in Question as Markets Weigh Risk Tolerance

2011-05-27 22:13:00
Christopher Vecchio, CFA, Sr. Currency Strategist

The New Zealand Dollar NZ$

NZD/USD NY Spot Close 0.81623

Kiwis_Run_in_Question_as_Markets_Weigh_Risk_Tolerance_body_nzdusd_risk.png, Kiwi’s Run in Question as Markets Weigh Risk Tolerance

Kiwi’s Run in Question as Markets Weigh Risk Tolerance

Fundamental Forecast for New Zealand Dollar: Neutral

The Kiwi gained 2.91 percent against the U.S. Dollar this week, despite a concerted shift to risk aversion by the broader markets as the European sovereign seemingly reached a tipping point. The key event this week that bolstered the antipodean currency in trade against its American counterpart was a 2-year inflation expectation report issued by the Reserve Bank of New Zealand, which forecasted a 3.0 percent inflation rate over said time period. The Kiwi rallied as the markets raised their expectations of an interest rate hike, with the markets now pricing in 58.0-bps into the Kiwi for the next 12-months, according to the Overnight Index Swaps index.

While last week only had one key event on the docket, the following week has some key events which could further spur the Kiwi higher against the U.S. Dollar. Early in the Asian session on Monday, the New Zealand trade balance report for April is due, which, despite the recent run higher by the antipodean currency, is expected to show a widening of the balance as imports are forecasted to have fallen to 3.70 billion from 4.07 billion, offsetting the loss in exports, which is forecasted to have declined to 4.30 billion in April from 4.53 billion in March. Later on, the NBNZ activity outlook and business confidence reports are due, which, after having fallen following the earthquake in Christchurch, are expected to continue their rebound. Also of note in the week is the building permits report for April, which is expected to have gained by 0.5 percent, according to the most recent Bloomberg News survey.

As risk sentiment is reignited, or as commodities push to return to their end-of-April levels, the Kiwi could find further support, as it is considered a commodity currency, similar to the Australian Dollar and Canadian Dollar. As the USD/NZD pair approaches the 0.8200 level, it is possible that traders take profits off the table, so there could be a slight pullback headed into next week. But, with the pair’s short-term moving averages higher than the long-term moving averages, the direction remains clearly bullish. -CV

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