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New Zealand Dollar Overbought, Fundamentals To Fuel Major Correction

New Zealand Dollar Overbought, Fundamentals To Fuel Major Correction

David Song, Strategist
New_Zealand_Dollar_Overbought_Fundamentals_To_Fuel_Major_Correction_body_Picture_5.png, New Zealand Dollar Overbought, Fundamentals To Fuel Major CorrectionNew_Zealand_Dollar_Overbought_Fundamentals_To_Fuel_Major_Correction_body_NZD012720120.jpg, New Zealand Dollar Overbought, Fundamentals To Fuel Major Correction

Fundamental Forecast for New Zealand Dollar: Bearish

The New Zealand dollar extended the advance from earlier this month to mark a fresh yearly high of 0.8249, but we may see a short-term correction in the week ahead as the high-yielding currency remains heavily overbought. As the rise in risk-taking behavior props up the kiwi, the NZD/USD may continue to retrace the decline from the previous year, but we should get a major reversal in the exchange rate once the relative strength index falls back below 70.

However, a near-term correction in the NZD/USD may turn into a full blown downtrend as the weakening outlook for the isle-nation instills a bearish forecast for the kiwi. Indeed, the Reserve Bank of New Zealand struck a neutral tone for monetary policy as the central bank sees delays to the rebuilding efforts from the Christchurch earthquake, and it seems as though the RBNZ will keep the benchmark interest rate at 2.50% for most of 2012 as the ongoing turmoil in the world financial system heightens the risks surrounding the region. As the RBNZ talks down the risk for inflation, Governor Alan Bollard may continue to resist calls to scale back the emergency rate cut from back in March, and the soft outlook held by the central bank is likely to dampen the appeal of the high-yielding currency as interest rate expectations falter. As the fundamental outlook for the region deteriorates, the marked appreciation in the NZD/USD is likely to be short-lived, and the recent run up certainly provides a good opportunity to short the pair as we expected to see the high-yielding currency face headwinds over the near-term.

Nevertheless, as the economic docket for the following week remains pretty bare, risk trends are likely to heavily influence price action over the coming days, and we may see the New Zealand dollar appreciate further next week should market participants continue to ramp up their appetite for higher yields. In turn, our bearish call for the NZD/USD may take some time to pan out, but we expect to see lower prices in 2012 as the central bank turns increasingly cautious towards the economy. - DS

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