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New Zealand Dollar Eyes Inflation Data amid Empty Docket

New Zealand Dollar Eyes Inflation Data amid Empty Docket

2012-07-13 23:21:00
Christopher Vecchio, CFA, Senior Strategist
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New_Zealand_Dollar_Eyes_Inflation_Data_amid_Empty_Docket_body_Picture_5.png, New Zealand Dollar Eyes Inflation Data amid Empty Docket

New Zealand Dollar Eyes Inflation Data amid Empty Docket

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand Dollar had a weak past five days save for Friday’s performance, shedding 0.07 percent against the US Dollar and finishing third-worst among the majors covered by DailyFX. But for the Friday rally, the New Zealand Dollar was the worst performing major through Thursday, shedding 0.89 percent against the US Dollar – this largely has to do with the Kiwi’s exposure to Europe (more on this below). Going forward, with another thin docket on our hands for New Zealand, and the Reserve Bank of New Zealand looming the week after, we expect the Kiwi’s price action to be determined by global risk-trends rather than pure New Zealand economic fundamentals. And, in light of the state of Europe, we have a neutral but slightly bearish outlook on the Kiwi for the week ahead.

Like the past two weeks, the economic calendar for New Zealand is rather then – in fact, but for one key print on Monday, the docket would be entirely void of any significant data. But with that said, the data due Monday is very important with respect to the Reserve Bank of New Zealand rate decision the following week: the second quarter inflation figures. Inflation remains under control in New Zealand in recent terms, only expected to have risen by 0.5% on a quarterly-basis, a Bloomberg News survey shows. However, on a yearly-basis, the more important gauge for the Reserve Bank of New Zealand, price pressures are forecasted to have dropped from 1.6% to 1.1%.

If weaker price pressures are becoming a problem, we expect the RBNZ to take note of this and hint at a possible rate cut to stimulate the economy going forward. This would certainly fit in with global central bank rhetoric, in which we’ve already seen the Federal Reserve, the European Central Bank, the Bank of England, and the People’s Bank of China step into the markets and unveil new, looser monetary policies over the past several weeks. A weak print would be bearish for the New Zealand Dollar; higher price pressures, especially on a yearly-basis, would be bullish.

Still, concerns globally are what are going to drive the Kiwi in the coming days, as aside from the inflation reading; there’s nothing else worth paying attention to on the docket for New Zealand, specifically. Mainly, Euro-zone concerns will be driving the New Zealand Dollar.

To wit: On February 6, Moody’s Investors Service said that the New Zealand economy was among the “most exposed” to the crisis, further noting that its banking system (along with Australia’s and Korea’s) is “more vulnerable to the first-round impact of a further worsening of the euro area crisis than other systems in Asia Pacific.” Indeed, since mid-March, when the Euro-zone crisis started reheating, New Zealand 5-year CDS have climbed over 33 percent, from 65.98 to 88.18 at the time of writing today. This is still much improved from its peak this year, when it climbed as high as 109.00 in early-June. Nonetheless, when Euro-zone issues come back – we’ve seen leaders’ attempts to stabilize markets fail in October and November 2011, late-February and early-March 2012, and then again after the Spanish bailout in June 2012 – the New Zealand Dollar will be most exposed. Because of these concerns, and given the weak inflation print expected, we maintain a neutral if not bearish tone for the Kiwi in the coming days. –CV

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