08.01.09 NZD

New Zealand Dollar May Lead Losers If Stock Rally Reverses

Fundamental Forecast for New Zealand Dollar: Bearish

- New Zealand Dollar Tumbles After RBNZ Interest Rate Announcement
- Unemployment Will Keep Growing, Says NZ Finance Minister
- Business Confidence Rose to Highest in Over Seven Years in July
- Trade Deficit Widens as Exports Fall 11%, Most Since July 2007

The New Zealand Dollar will continue to look to risk trends to guide directional momentum in the week ahead: further gains can be expected if stock markets are to remain supported, but any opportunity for economic fundamentals to recapture the spotlight will likely open the door for a sharp reversal lower. The comparatively higher-yielding currency has attracted risk-seeking capital despite admonitions from RBNZ Governor Alan Bollard, who said following the central bank’s last policy meeting that recent appreciation of the New Zealand Dollar is “not helping the sustainability of future growth, and brings with it additional economic risks.” Talking down the currency may not prove fruitful, however, with the market firmly focused on US news to drive risk sentiment and with it the Kiwi dollar. On that front, the calendar is packed with market-moving event risk in the week ahead, culminating with the always significant Non Farm Payrolls report. Modest improvements are expected nearly across the board, which points to smooth sailing for risky assets barring any significant downside surprises on key metrics or a particularly disappointing second-quarter earnings outcome from a major company.

That said, technical positioning is hinting that the equities rally that began in March is starting to run out of momentum and may be on track to putting in a double top at the October 2008 swing high, with volumes steadily declining since early May and clear negative divergence between rising prices and stalling relative strength studies. If stock markets do indeed turn lower, the New Zealand Dollar stands to lose disproportionately more than it’s equally risk-driven counterpart in Australia as the market’s attention shifts back to the dismal state of the smaller antipodean economy, complete with a precarious sovereign credit outlook and the central bank’s clear promise to keep interest rates “at or below the current level [through] the latter part of 2010.”

Turning to scheduled economic data releases, the stand-out report to watch is July’s ANZ Commodity Price Index. The metric is likely to underline once again the damaging effect of a stronger local currency on New Zealand’s exporters, a sector that contributes up to 30% to overall economic growth, and help open the door for sellers to gain the upper hand. Recent Kiwi dollar appreciation has made the country’s goods comparatively more expensive for foreign buyers, leading Prime Minister John Key to conclude that the exchange rate was “derailing” the economy. Ratings powerhouse Fitch has also decried the fact that the currency is “more responsive to global financial conditions than to domestic economic fundamentals,” saying this complicates the necessary adjustments to New Zealand’s current account and budget deficits. These comments in addition to similar sentiments out of the central bank (noted above) could fuel expectations that, as we noted in last week’s forecast, an interest rate cut is the next logical step to check the currency’s ascent.

Elsewhere on the docket, private sector Labor Costs are expected to grow by a meager 0.5% in the second quarter, the least in over 4 years, reflecting the same kind of aggressive cost-cutting that has been seen across firms in industrial economies and that has produced upside earnings surprises over recent weeks despite small to non-existent revenues. The release will foreshadow employment numbers set to cross the wires two days later, with forecasts suggesting the jobless rate ticket higher to 5.7% in the three months through June, the highest reading since the fourth quarter of 2000.