NZD/USD Hits 2016 Highs As Fed Backs Off Aggressive Hike Path
Fundamental Forecast for the New Zealand Dollar: Nuetral
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The New Zealand Dollar hit 2016 highs this week on the back of a dovish Federal Reserve announcement where the number of expected interest rate hikes was lowered from four to two. This development allowed risk markets like stocks, commodities like US Oil, and commodity currencies like the New Zealand Dollar to rally to new highs. In addition to the rally, a world of panic among financial markets in the first month and a half of the year has completely flipped on the back of the ever weakening US Dollar. Given the recent RBNZ rate cut, NZD bears are obviously perplexed as we could soon break into levels not seen since summer 2015.
The week started off rough for the Kiwi with another drop in the Dairy Auction for Whole Milk Powder coming in at $1971 per ton vs. expectations of $1974. This showed a continual drop in the price of one of the nation’s most prized commodities from a 6-month high in October from $2,824 per ton. Additionally, New Zealand’s 4Q Balance of Payment (BoP) showed a narrowing deficit moving from -$4.7249b up to -$2.875b. On Tuesday, the Gross Domestic Product (GDP) came in better than expected, which helped push the NZD/USD exchange rate to the highest levels since October/ December in the 0.68/0.69 region.
This week, the major release is Wednesday’s Trade Balance report. Exports are expected to increase to 4.01b from 3.90b while imports are expected to remain steady near 3.90b. A further increase of exports past the expected level of $4.01b could be seen as reason for the NZD to go bid even higher as the RBNZ could see this as reason to limit further hikes. The RBNZ is still expected to cut later this year once more so any news that would show this move as unnecessary would be another reason to buy the NZD against weaker currencies.
Considering the upcoming data, NZD/USD may continue to advance into the December high (0.6882), and the key developments coming out of New Zealand’s construction, retail spending and business services could make up for the drop in Dairy exports. If the New Zealand economy remains stable at the same time that the U.S. Dollar goes without a bid, we could soon move closer to 0.7000.
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