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NZD/USD Outlook Mired by Slowing New Zealand GDP, Upbeat FOMC

NZD/USD Outlook Mired by Slowing New Zealand GDP, Upbeat FOMC

2016-03-12 23:56:00
David Song, Strategist
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NZD/USD Outlook Mired by Slowing New Zealand GDP, Upbeat FOMCNZD/USD Outlook Mired by Slowing New Zealand GDP, Upbeat FOMC

Fundamental Forecast for the New Zealand?Dollar: Bearish

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NZD/USD struggled to hold its ground after the Reserve Bank of New Zealand (RBNZ) unexpectedly reduced the official cash rate by 25bp to 2.25% at the March 10 meeting, and the New Zealand dollar stands at risk of facing further losses over the coming week should the key data prints coming out of the region fuel speculation for additional monetary support.

Even though New Zealand’s 4Q Balance of Payment (BoP) is anticipated to show a narrowing deficit, the Gross Domestic Product (GDP) report may drag on the exchange rate as the economy is expected to grow an annualized 2.1% following the 2.3% expansion during the three-months through September. Indeed, signs of a slowing recovery may encourage the RBNZ to further insulate the real economy over the coming months, and Governor Graeme Wheeler may continue to endorse a dovish outlook for monetary policy amid the weakening outlook for global growth.

At the same time, the Federal Open Market Committee’s (FOMC) interest rate decision may boost the appeal of the greenback and spark a near-term selloff in NZD/USD should the fresh batch of central bank rhetoric highlight the deviating paths for monetary policy. Even though the FOMC is widely expected to preserve its current policy next week, the updated projection may signal that the committee will stay on course to implement higher borrowing-costs throughout 2016, and the central bank may continue to prepare U.S. households businesses for higher borrowing-costs as the economy approaches ‘full-employment,’ while Chair Janet Yellen remains confident in achieving the 2% inflation-target over the policy horizon.

In turn, NZD/USD may continue to pare the advance from earlier this year as it appears to have made a failed run at the December high (0.6882), and the key developments coming out of New Zealand and the U.S. may spark a bearish outlook for the exchange rate amid the deviating paths for monetary policy.

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