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New Zealand Dollar Rebound Threatened by Dovish RBNZ

New Zealand Dollar Rebound Threatened by Dovish RBNZ

2012-06-09 04:59:00
Christopher Vecchio, CFA, Senior Strategist
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New_Zealand_Dollar_Rebound_Threatened_by_Dovish_RBNZ_body_Picture_5.png, New Zealand Dollar Rebound Threatened by Dovish RBNZ

New Zealand Dollar Rebound Threatened by Dovish RBNZ

Fundamental Forecast for New Zealand Dollar: Bearish

The New Zealand Dollar was the second best performer this week, finishing just 0.12 percent lower against the top performer, the Australian Dollar. The Kiwi crushed the safe haven currencies, the Japanese Yen and the US Dollar, appreciating by 3.72 percent and 2.05 percent, respectively. As Currency Strategist Ilya Spivak frequently notes, the New Zealand Dollar has a very tight correlation to the MSCI World Stock Index, so the commodity currency is at bay to global risk trends. Similarly, with one of the highest exposures in the Asian-Oceanic region to the European banking, any significant deterioration in the Euro-zone crisis tends to weigh heavily on the New Zealand Dollar. As such, with little data due out of New Zealand and a cautious Reserve Bank of New Zealand policy statement due, the Kiwi holds a bearish bias for the week ahead.

Taking a look at data this week, there’s really only one event on the docket this week that is Kiwi-specific and could provoke the currency to decouple from its recently strong correlations to the Australian Dollar and the MSCI World Stock Index: the Reserve Bank of New Zealand Rate Decision on Wednesday. It is widely expected that the RBNZ will leave its key interest rate on hold at 2.50 percent, according to a Bloomberg News survey. Over the past week, the likelihood of a 25-basis point rate cut has decreased, from 49.0 percent to 18.0 percent, and similarly, the number of basis points being priced out of the New Zealand Dollar has dropped from 44.0 to 21.0.

However, in light of the recent International Monetary Fund Mission to New Zealand Report, it is clear that outside observers believe that the economy remains fragile amid a slow recovery from the earthquake last February in Christchurch, New Zealand. The IMF report noted that “Domestic demand has remained soft as households and businesses continue to deleverage amid a weak housing market and an uncertain outlook. Elevated rates of unemployment, currently above 6 percent, and spare capacity have helped contain inflation.” We broadly expect the RBNZ to echo these sentiments in an effort to verbally “talk down” the currency, and with the situations in China and in Europe starting to look worse and worse with each passing day, the combined impact of these influences leads us to a bearish outlook for the New Zealand Dollar in the week ahead. –CV

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