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New Zealand Dollar To Benefit From Faster Growth, Inflation

New Zealand Dollar To Benefit From Faster Growth, Inflation

2011-10-29 04:27:00
David Song, Currency Strategist
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New_Zealand_Dollar_To_Benefit_From_Faster_body_Picture_5.png, New Zealand Dollar To Benefit From Faster Growth, InflationNew_Zealand_Dollar_To_Benefit_From_Faster_body_Picture_6.png, New Zealand Dollar To Benefit From Faster Growth, Inflation

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand dollar advanced to a fresh monthly high of 0.8240 and the high-yielding currency may continue to appreciate in November as the central bank drops its dovish tone for monetary policy. As the economic docket for the following week is expected to show a 0.6 percent rise in employment paired with a 0.9 percent expansion in private wages, the developments should increase the outlook for growth and inflation, and the Reserve Bank of New Zealand may show a greater willingness to restore the benchmark interest rate to 3.00 percent as it aims to balance the risks for the region.

After keeping the cash rate at 2.50 percent, RBNZ Governor Alan Bollard said the rebuilding efforts from the Christchurch earthquake is expected to ‘provide significant impetus for demand,’ and went onto say that the a gradual rise in domestic price pressures will require higher interest rates as price growth continues to hold above the 1 to 3 percent target range. In turn, market participants now see borrowing costs increasing by nearly 50bp over the next 12-months according to Credit Suisse overnight index swaps, and the rise in interest rate expectations should carry the kiwi higher as the central bank looks to toughen its stance against inflation. However, we may see the RBNZ maintain its current policy throughout the remainder of the year as the fundamental outlook for the global economy remains clouded with high uncertainty, and the central bank may carry its wait-and-see approach into 2012 as policy makers expect to see a ‘modest’ recovery over the near-term.

As growth and inflation picks up, the NZD/USD looks poised to extend the rebound from 0.7471, and the exchange rate should continue to retrace the sharp decline from the end of August (0.8571) as long as risk sentiment gather pace. However, we may see a short-term correction pan out next week as the greenback remains oversold, and the kiwi-dollar may fall back towards the 78.6% Fibonacci retracement from the 2009 low to the 2011 high around 0.8000 as long as the relative strength index holds below 70. - DS

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