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New Zealand Dollar Rebound To Be Short-Lived As Growth Slows

New Zealand Dollar Rebound To Be Short-Lived As Growth Slows

2011-09-16 21:34:00
David Song, Currency Strategist
Share:
New_Zealand_Dollar_Rebound_To_Be_Short-Lived_As_Growth_Slows_body_ScreenShot089.png, New Zealand Dollar Rebound To Be Short-Lived As Growth Slows

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand dollar bounced back from a monthly low of 0.8118, but the growth report scheduled for the following week could weigh on the high-yielding currency as the data is expected to instill a weakened outlook for the isle-nation. The GDP report is anticipated to show the economy expanding 0.5% in the second quarter after growing 0.8% during the first-three months of 2011, and the slowdown in economic activity is likely to spark a bearish reaction in the kiwi as the central bank holds a cautious outlook for the region.

The Reserve Bank of New Zealand curbed its outlook for future growth as the marked appreciation in the local currency dampens the prospects for world trade, and saw a risk of global growth slowing ‘sharply’ after holding the benchmark interest rate at 2.50%. At the same time, RBNZ Governor Alan Bollard talked down the risk for inflation, stating that the strength in the kiwi has helped to insulate the economy from imported price growth, but went onto say that borrowing costs ‘will need to increase’ should the slowdown in global growth have a ‘mild impact’ on the isle-nation. Despite the dovish comments from the RBNZ, market participants still see the central bank restoring the interest rate back to 3.00% over the next 12-months according to Credit Suisse overnight index swaps. In turn, speculation for higher borrowing costs should help to prop up the New Zealand dollar, but market sentiment may have a greater influence in dictating price action for the high-yielding currency as risk trends continue to drive volatility in the foreign exchange market.

The rise in risk sentiment should help to prop up the New Zealand dollar in the week ahead, and the NZD/USD may continue to recoup the losses from earlier this month as the pair carves out a bottom ahead of 0.8100. However, a shift in risk taking behavior would sap demands for the kiwi, and the exchange rate may threaten the rebound from back in August (0.7964) as market participants scale back their appetite for yields. - DS

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