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New_Zealand_Dollar_at_Critical_Point_Ahead_of_Q4_GDP_Report_body_Picture_1.png, New Zealand Dollar at Critical Point Ahead of Q4 GDP Report

New Zealand Dollar at Critical Point Ahead of Q4 GDP Report

Fundamental Forecast for US Dollar: Bearish

The New Zealand Dollar fell sharply on Thursday as the Reserve Bank of New Zealand decided to hold its benchmark rate unchanged at a record low 2.5 percent for a 16th straight meeting. Warnings over a potential rate cut on an overvalued currency intensified the sell-off. The Kiwi rebounded to its pre-report level at Friday’s close, but it still faces downside pressure as New Zealand’s fourth quarter GDP report will be released on Wednesday.

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The reserve bank has made it very clear in its latest monetary policy statement that a higher exchange rate “in the absence of a corresponding relative strengthening economy would warrantlower interest rates”. Questions to traders are when the rate cut will happen and how deteriorating fundamentals could trigger the change. According to a survey by Bloomberg News, the current consensus forecast call for an unchanged rate on April 24. Yet outlook for the target rate could be completely revised once fourth-quarter Gross Domestic Product results are delivered. We could see important volatility in New Zealand dollar currency pairs on any surprises.

GDP will be a perfect indicator to measure the fundamental changes in New Zealand. The index is forecast to increase by 2 to 3 percent on a yearly basis according to the Reserve Bank; any outcome outside this range will be a surprise markets. Risks to growth are export sectors, which may be hampered by the expensive currency and the cost and timing of the reconstruction process in Christchurch. But keep in mind that the central bank watches moves in the New Zealand dollar in both directions. A rise to levels not consistent with underlying economic conditions will lead to a rate cut. On the contrary, if the Kiwi declines at a faster pace than the real economy supports, the central bank would respond with monetary policy tightening to ease inflation pressures.

On the external side, the Reserve Bank of Australia will issue March policy meeting minutes on Tuesday. An improving economic outlook in Australia, New Zealand’s most important trade partner, may strengthen the exports and imports between the two countries and therefore provide support to the KiwiNew Zealand’s second-largest partner, China, will announce its new central bank head on Saturday. The likelihood of current governor Zhou Xiaochuan to stay has grown significantly, as he is now exempt from effectively mandatory retirement at the age of 35 as he has now been made a government leader. His extension would provide stability when China is trying to maintain moderate economic growth. Yet it may not be good news for New Zealand as the governor has reiterated central bank focus on fighting inflation. Thus, more tightened monetary policies may be carried out and therefore reduce China’s oversea purchases and hurt New Zealand’s export sectors.-RM