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New Zealand Dollar to Follow Stocks on Euro Crisis, Global Growth Bets

New Zealand Dollar to Follow Stocks on Euro Crisis, Global Growth Bets

Ilya Spivak, Head Strategist, APAC
New_Zealand_Dollar_to_Follow_Stocks_on_Euro_Crisis_Global_Growth_Bets_body_Picture_5.png, New Zealand Dollar to Follow Stocks on Euro Crisis, Global Growth Bets

Fundamental Forecast for New Zealand Dollar: Neutral

An iron-clad correlation with the MSCI World Stock Index and a lackluster domestic economic calendar puts the New Zealand Dollar the mercy of market-wide risk sentiment trends. On one hand, this puts the focus on US economic growth expectations as traders work out the probability that a pick-up in the US will be able to counter headwinds facing global performance from a slump in Europe and a slowdown in Asia. On the other, fears that turmoil in Greece is metastasizing to engulf the Eurozone and possibly spark a wider credit crisis continue to linger.

Sizing up the US calendar, the spotlight is likely to fall on the Richmond and Kansas City Fed surveys as markets continue to build their baseline for where world’s top economy stands in May. Expectations point to mixed results and traders will be keen to put the final outcomes in the context of last week’s mixed news-flow, where a stronger Empire Manufacturing gauge was tarnished by a deeply disappointing Philadelphia Fed print. The final revision of May’s University of Michigan Consumer Confidence gauge rounds out the docket. Soft readings are likely to fan the flames of QE3 speculation, a supportive development for risk appetite and the Kiwi Dollar alike. Scheduled remarks from the Fed’s Kocherlakota, Lockhart, Plosser and Dudley will be interpreted along the same lines.

In the Eurozone, the tone for the week will be set by a G8 summit taking place at Camp David over the weekend. Markets will be holding out hope for signs of an emerging multilateral response to ensure global financial markets are protected from contagion. The absence of concretely reassuring rhetoric is likely to weigh on risky assets and the New Zealand unit, while a convincing commitment to swift stabilization policy would be supportive on both fronts. The preliminary set of May’s Eurozone PMI figures may likewise enter into the equation, updating markets on the extent to which a deepening slowdown threatens to sabotage deficit-reduction efforts and amplify credit market stress.

April’s Trade Balance figures amount to the only bit of noteworthy domestic event risk, with immediate fireworks unlikely. The flash Chinese Manufacturing PMI print from HSBC may prove market-moving however. Needless to say, the manufacturing sector is at the heart of China’s export prowess and thereby represents a crucial engine for Asian and overall global growth, and so the PMI release has potential to be an important inflection for risk sentiment trends.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.