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New Zealand Dollar to Fall if Fed Rate Hike Fears Fuel Risk Aversion

New Zealand Dollar to Fall if Fed Rate Hike Fears Fuel Risk Aversion

Ilya Spivak, Head Strategist, APAC
New Zealand Dollar to Fall if Fed Rate Hike Fears Fuel Risk Aversion

Fundamental Forecast for New Zealand Dollar: Bearish

  • Soft Second-Quarter PPI Data May Undermine RBNZ Rate Hike Bets
  • NZ Dollar to Decline if US CPI, FOMC Minutes Trigger Risk Aversion
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A relatively timid domestic calendar is led by second-quarter PPI figures. New Zealand price-growth data has increasingly underperformed relative to consensus forecasts since February, suggesting economists have tended to overestimate inflation and opening the door for a soft print. Such an outcome would suggest the RBNZ may be relatively slow to resume raising interest rates after signaling a pause, weighing on the exchange rate.

External factors may prove to be a more robust catalyst as hefty event risk emerges from the US by way of July’s CPI figures as well as the release of minutes from last month’s FOMC policy meeting. The headline year-on-year inflation rate is expected to tick slightly lower to 2.0 percent, down from 2.1 percent in the prior month. A steady stream of above-consensus readings since the beginning of the year seems to put surprise risk on the upside.

As for the Fed, it notably upgraded its language on price growth in July’s FOMC statement, saying the “likelihood of inflation running persistently below 2 percent has diminished. Indeed, it will be the reasoning behind this seemingly subtle but nonetheless significant change in verbiage that investors will be most concerned with as they comb through the Minutes document. If policymakers are turning more sanguine about inflation, that means the time gap between the end of QE3 – expected in October – and the first subsequent interest rate hike may prove relatively short. An upbeat CPI print would only reinforce such thinking.

On balance, such a scenario bodes ill for the New Zealand Dollar. As the highest-yielding currency in the G10 FX space, the Kiwi stands out as particularly vulnerable if risk appetite unravels and capital flees return-oriented assets for safer shores. The prospect of a sooner-than-expected start to Fed tightening may trigger just such a dynamic. The formative role of US monetary policy in supporting risk sentiment is hardly controversial at this point; one need only compare the five-year trajectory of the S&P 500 and the US central bank’s balance sheet to see it. As stimulus helped build out the risk-on rally since the end of the 2008-09 crisis, so too a shift toward a more hawkish posture may undermine it, and in so doing sink the New Zealand Dollar.

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