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New_Zealand_Dollar_to_Pare_Gains_as_Debt_Crisis_Comes_Back_Into_Focus_body_Picture_5.png, New Zealand Dollar to Pare Gains as Debt Crisis Comes Back Into Focus

Fundamental Forecast for New Zealand Dollar:Bearish

The New Zealand dollar ended the week higher by 1.14% against the greenback after a mid-week rally in risk saw higher yielding currencies advance across the board. With no data out of the isle-nation this week price action was largely driven by broader market sentiment as concerns over the European sovereign debt crisis temporarily eased.

Data out of New Zealand remains light next week with little in the way of economic reports. With that in mind, the focus is likely to shift back onto Europe after rating agency Fitch downgraded Italy and Spain’s credit ratings late in the day on Friday. The move to downgrade the region’s third and fourth largest economies is likely to rekindle debt concerns with Fitch assigning a negative outlook for both sovereigns on concerns that the crisis in Europe is intensifying.

The kiwi is likely to pare this week’s gains as investors once again brace for a possible default out of the Euro-zone with higher yielding, commodity backed currencies like the kiwi and the aussie likely to come under pressure. Interest rate expectations from the Reserve Bank of New Zealand have also continued to deteriorate, with Credit Suisse overnight swaps now factoring only 24 basis points in rate hikes for the next twelve months. That figure is down from 30 a week earlier and suggests the RBNZ may maintain its wait-and-see approach as Europe’s crisis continues to threaten the stability of the global economy.

The NZD/USD failed to hold a break above the 7750 resistance level before pulling back sharply on news of the Fitch downgrades, settling just above the 0.77-figure at the close of trade. The pair broke below the lower bound trendline of an ascending channel formation dating back to October 3rd and looks head lower as risk appetite deteriorates. Interim support now rests at the 23.6% Fibonacci extension taken from the September 27th and October 7th crests at 7680. A break here eyes subsequent support targets at 7640 and the 38.2% extension at 7608. Topside resistance holds at 7720 with subsequent ceilings eyed at 7780 and 7830. -MB