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New Zealand Dollar at the Mercy of Market-Wide Sentiment Trends

Fundamental Forecast for New Zealand Dollar: Neutral

  • NZ Dollar at the Mercy of Risk Trends Amid Lull in Domestic News Flow
  • Global Growth Fears and Ending Fed Stimulus Put Sentiment at Risk
  • Help Identify Critical Turning Points for NZD/USD Using DailyFX SSI

A quiet economic calendar on the domestic front is likely to see the New Zealand Dollar price action fall in with broad-based risk appetite trends in the week ahead. That probably spells volatility for the sentiment-geared currency as heretofore complacent investors begin to see a perfect storm of risk aversion gathering on the horizon.

The markets appeared to be taking the approaching end of the Federal Reserve’s QE3 asset purchase program in stride until relatively recently. While the swell in risk-geared assets has been closely linked with the US central bank’s generous stimulus efforts, traders seemed content enough with the post-Q1 recovery in US economic news-flow to believe that asset prices need not necessarily unravel after liquidity injections are wound down.

This relative calm appears to be giving way as policymakers from seemingly all directions sound the alarm about “frothy” valuations while global growth bets fizzle. Fears of another recession in Europe coupled with a deep slowdown in China had been somewhat muted amid hopes that a robust US would amount to a strong-enough countervailing force. Such rosy notions were notably upset last week as minutes from September’s FOMC meeting revealed concerns about contagion.

The churn continues in the week ahead. In the US, speculation about the length of the time gap between the end of QE3 and the first subsequent rate hike will be informed by September’s PPI data. On the growth front, Retail Sales and Industrial Production figures as well as the Fed’s Beige Book survey of regional economic conditions will help inform bets on whether the US is strong enough to hold up global demand as output elsewhere falters.

Meanwhile, a Chinese Trade Balance and CPI readings will help to gauge just how deep of a slump is developing in the East Asian giant and what might be done about it. The inflation gauge seems like it might draw particular attention, with a softer print likely to be seen as opening the door for Beijing to expand policy support, and vice versa.

On balance, the path of least resistance seems to favor risk aversion. It seems altogether naïve to think that risky assets will happily resume a steady advance even as the Fed withdraws its helping hand and growth forecasts are roundly slashed. Timing such reversals is notoriously difficult however, and it remains unclear if the week ahead will ultimately deliver the seemingly inevitable breakdown. A bout of volatility is almost surely in the cards however, with swings risk appetite set to be mirrored in Kiwi performance.