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New Zealand Dollar: Will Larger Deficits Overshadow Faster Growth?

New Zealand Dollar: Will Larger Deficits Overshadow Faster Growth?

David Song, Strategist
NZ_Dollar_Will_Larger_Deficits_Overshadow_Faster_Growth_body_Picture_5.png, New Zealand Dollar: Will Larger Deficits Overshadow Faster Growth?NZ_Dollar_Will_Larger_Deficits_Overshadow_Faster_Growth_body_Picture_6.png, New Zealand Dollar: Will Larger Deficits Overshadow Faster Growth?

Fundamental Forecast for New Zealand Dollar: Bearish

The New Zealand dollar fell back from a fresh monthly high of 0.7980, and the high-yielding currency should weaken further over the near-term as the shift away from risk-taking behavior gathers pace. As the slew of credit-rating downgrades in Europe drags on investor confidence, we should see the flight to safety get carried into the following week, and the NZD/USD looks primed for a major decline as it appears to have carved out a lower top in January.

As the sovereign debt crisis threatens the world financial system, the Reserve Bank of New Zealand warned of higher funding costs dragging on the real economy, and the heightening risk for contagion is likely to bear down on the exchange rate as New Zealand’s reliance on international financing dampens the appeal of the kiwi. In turn, we expect RBNZ Governor Alan Bollard to keep the benchmark interest rate at 2.50% throughout the first-half of 2012, and the central bank head may preserve the record-low rate over the medium-term as the fundamental outlook for the isle-nation remains clouded with high uncertainly. In turn, Moody’s Investor Services warned that New Zealand credit rating may be at risk should it face increased difficulty in obtaining external financing, and encouraged the government to tackle its budget deficit as the central bank continues to shore up the real economy.

As the NZD/USD fails to push back above the 78.6% Fibonacci retracement from the 2009 low to the 2011 high around 0.7990-0.8000, the lower high certainly points to further weakness, and we may see the kiwi-dollar give back the rebound from November (0.7370) as market participants scale back their appetite for risk. However, as the region benefits from the rebuilding efforts from the Christchurch earthquake, positive developments coming out next week may help to prop up the New Zealand dollar, and the high-yielding currency may trend sideways in the days ahead as the NZD/USD maintains the narrow range from the beginning of the year. - DS

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