Data Outlook Supportive of Kiwi, but will Risk Trends Allow?
Fundamental Forecast for New Zealand Dollar: Neutral
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The New Zealand Dollar had a strong week, pushing out its strongest three-day rally to end the week, up against all the majors save the Euro, which it finished a mere 0.02 percent lower against. Against the Japanese Yen and the US Dollar, the Kiwi was the strongest, appreciating by 1.20 percent each. And while the NZDUSD is sitting at its highest level since May 3, we remain cautious on the Kiwi’s outlook: the New Zealand Dollar has traded very closely to risk trends the past several weeks, that it is likely to be volatile in either direction; misunderstood words fueled it up this week, and some clarity could pull the Kiwi right back down. Because of this uncertainty, despite a largely supportive economic docket, we are taking a neutral stance on the New Zealand Dollar for the five days ahead.
While the docket is thin once again (now that the Reserve Bank of New Zealand rate decision is in the past), the data trend is expected to be positive overall, which boosts the domestic fundamental outlook despite exogenous headwinds. Thus, while we don’t find that the data should be exceptionally market moving, if positive, it should raise the floor on any Kiwi declines in the week ahead.
There are two releases of note on the calendar. On Sunday, Building Permits for June will be released, which should show growth of +7.3%. While this barely recoups the losses from the -7.1% contraction in May, it does represent a welcomed rebound after Building Permits peaked in March for the year. Overall, Building Permits are up +4.2% for the year, and if the figure due Sunday meets expectations, they will have increased by +11.8% in 2012 with half a year still to go (this is bullish for the Kiwi). On Tuesday, the NBNZ Business Confidence reading for July is due, and while no reading is expected, we do expect an uptick. We believe stronger than expected growth data from New Zealand as well as Australia (New Zealand’s largest trading partner) alongside a supportive Reserve Bank of New Zealand should keep confidence boosted. June’s reading was the lowest of the year, and the lowest since March 2011, and we are hard pressed to think Business Confidence will fall to its lowest levels right after the early-2011 earthquakes.
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 27 percent, from 65.98 to 84.16 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, we believe they balance out the bullish undertones to the New Zealand data due this week, and thus we maintain a neutral but hopeful bias for the New Zealand Dollar in the days ahead. –CV
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