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New Zealand Dollar Rally To Gather Pace on Faster Growth

New Zealand Dollar Rally To Gather Pace on Faster Growth

2011-07-09 02:54:00
David Song, Strategist
New_Zealand_Dollar_Rally_To_Gather_Pace_on_Faster_Growth_body_Picture_5.png, New Zealand Dollar Rally To Gather Pace on Faster Growth

New Zealand Dollar Rally To Gather Pace on Faster Growth

Fundamental Forecast for New Zealand Dollar: Bullish

The New Zealand dollar advanced to a fresh record high of 0.8370 and the high-yielding currency may continue to push higher in the week ahead as the 1Q GDP report is expected to show a faster recovery in the isle-nation. Economic activity is expected to increase another 0.3% in the first three-months of 2011 following the 0.2% expansion during the previous period, and the stronger rate of growth is likely to spark a bullish reaction in the NZD/USD as market participants expect to see higher borrowing costs in the region.

As Reserve Bank of New Zealand Governor Alan Bollard sees scope to gradually normalize monetary policy, market participants see borrowing costs increasingly by nearly 75bp over the next 12-months according to Credit Suisse overnight index swaps, and interest rate expectations may gather pace in the second-half of the year as the central bank adopts an improved outlook for the region. As the NZD/USD trades within an upward trending channel, the technical outlook for the pair remains fairly bullish, and the kiwi may continue to outperform against its major counterparts should the RBNZ continue to talk up speculation for higher rates. However, as the marked appreciation in the local currency curbs the risk for inflation and instills a weakened outlook for global trade, Governor Bollard may highlight the dampening effect of the higher exchange rate in an effort to temper to balance the risks for the region.

Nevertheless, risk sentiment is likely to heavily influence price action for the NZD/USD ahead of the GDP report as the economic docket remains fairly light for the beginning of the week, and the kiwi-dollar could face a small correction in the days ahead as long as the relative strength index continues to hold below overbought territory. At the same time, we could see fresh record-high prices in the exchange rate should the growth rate top forecasts, and the bullish sentiment underlying the high-yielding currency may gather pace over the near-term as the economic developments show a strengthening recovery in New Zealand. – DS

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