Fundamental Forecast for New Zealand Dollar: Bearish
NZ Dollar Down to 6-Week Low on Eroding RBNZ Rate Hike Outlook
Selling Pressure May Persist as US News-flow Triggers Risk Aversion
The New Zealand Dollar proved to be the worst-performing currency last week, sliding over 1.5 percent against its US counterpart. The move lower tracked a dramatic decline in New Zealand’s benchmark 10-year bond yield, pointing to eroding RBNZ interest rate hike expectations as the catalyst behind the selloff. A pre-emptive reversal began early in the month amid murmurs of a forthcoming pause in the central bank’s tightening. These fears were confirmed last week as Governor Graeme Wheeler signaled that rate hikes are on hold for time being, sending the currency to the lowest level in nearly two months.
Meanwhile, an extensive supply of heavy-duty activity data will speak more directly to how quickly overt tightening may occur. The spotlight will on second-quarter GDP figures and July’s Employment report. The former is expected to show that economic growth snapped back aggressively following the seemingly weather-driven slump in the first three months of the year. The annualized growth rate is seen printing at 3 percent after a dismal 2.9 percent drop in the prior period. As for the jobs report, economists are looking for a 231,000 increase in nonfarm payrolls. That would amount to the sixth consecutive month above the closely-watched 200k threshold, making for the steadiest such run in job creation in over a decade.
The significance of Fed monetary policy to supporting risk appetite in
the post-crisis rebound from 2009 lows is hardly a controversial
subject at this point. That means news-flow arguing for stimulus to be
withdrawn relatively sooner than the second half of 2015 – seemingly
the markets’ baseline scenario – may force a selloff across
sentiment-sensitive assets. Needless to say, the Kiwi’s yield advantage
against its G10 FX counterparts puts it firmly on the risk-on side of
the spectrum, making it highly vulnerable to selling pressure if
broad-based liquidation takes hold.
