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New Zealand Dollar Weakness to Persist as Fed Rates Outlook Firms

New Zealand Dollar Weakness to Persist as Fed Rates Outlook Firms

2014-08-22 22:57:00
Ilya Spivak, Head Strategist, APAC
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New Zealand Dollar Weakness to Persist as Fed Rates Outlook Firms

NZDUSD [2HR – 08/22/2014] Chart created using FXCM Marketscope

Fundamental Forecast for New Zealand Dollar: Bearish

  • NZ Dollar to be Driven by Macro Themes, Fed Rates Outlook in Focus
  • Upbeat US Economic Data May Boost US Tightening Bets, Sink Kiwi
  • Help Identify Critical Turning Points for NZD/USD with DailyFX SSI

A lull in high-profile domestic news-flow puts external forces in the spotlight as the primary drivers of New Zealand Dollar price action in the week ahead. The central issue on this front continues to be the evolution of the expected time gap between the end of the Fed’s QE3 asset purchases in October and the first subsequent interest rate hike.

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.

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 Fed notably upgraded its language on inflation in July’s FOMC statement, saying the “likelihood of inflation running persistently below 2 percent has diminished. This tone shift and its supportive implications for the possibility that stimulus removal will begin relatively sooner than otherwise was further brandished in minutes from last month’s sit-down as well as Fed Chair Yellen’s comments at the Jackson Hole Economic Symposium.

The week ahead brings ample opportunities to build on this narrative, with a flurry of US economic data releases due to cross the wires. July’s Home Sales and Durable Goods Orders as well as Augusts’ Markit PMI and Consumer Confidence figures are all on tap. In trend terms, the performance of US economic news-flow has markedly improved since early April. Indeed, a Citigroup index measuring realized outcomes relative to consensus forecasts now shows data results are outperforming expectations by the widest margin in six months. This hints that analysts are underestimating the vigor of the US economy, opening the door for upside surprises on upcoming reports that amplify Fed rate hike bets and punish the Kiwi further.

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