New Zealand Dollar Vulnerable To Pullback In Risk Appetite

New Zealand Dollar Vulnerable To Pullback In Risk Appetite

Fundamental Outlook for New Zealand Dollar: Bullish

-    New Zealand retail sales rose 1.1% in August, doubling expectations of 0.5%
-    3Q Consumer prices surged 1.7% from 0.6% the three months prior.
-    Business NZ PMI to 51.7, the first expansion since April, 2008.

The New Zealand Dollar mad a steady advance throughout the week setting fresh yearly high along the way before finding resistance. Soaring risk appetite and a week of bullish fundamental data helped drive the Kiwi higher. Equity markets continued to trend higher in the back of a strong start to corporate earnings season with several blue chip names beating estimates. The Dow Jones Industrial Average hitting the psychological level of 10,000 led traders to take stock of current valuations and fears that the rally may be a bit overdone led to profit taking at the end of the week.

A strong retail sales report started the week on a strong note for the high yielder as the 1.1% increase in consumption more than doubled estimates of 0.5%. The strong consumer demand calmed fears that domestic growth would lag the rise in demand from abroad. New Zealander’s increased ate out more often and increased their purchases at department stores as they sought out new clothing and furniture. The pattern of shopping demonstrates reflects the rising consumer confidence which reached a four year high in the third quarter. An improving global economy has boosted demand for exports which pushed the manufacturing industry into expansion in September for the first time in eighteen months. Strong gains in new orders and employment are strong signs that growth will continue. Unfortunately rising prices followed the gain in growth as consumer prices rose 1.7% during the third quarter which will put the RBNZ in a difficult situation. An increase in costs for transportation and household goods will put the central bank on alert and may force them to start tightening monetary policy sooner than they planned.

Traders are now expecting 202 bps of rate increases in the next 12 months, up from 154 before the inflation report, according to a Credit Suisse index based on swaps trading. Therefore, we may see continues support for the New Zealand dollar as long as risk appetite remains firm. If concerns of the sustainability of global growth start to weigh ion demand for risky assets then the unwinding of the carry trade will lead the NZD/USD lower. The question becomes is Dow 10,000 a catalyst to sidelined traders to seek higher returns or a barrier until growth risks subside. Fundamentally we will not have the amount of event risk as last week with credit card spending and performance of services on tap which should leave price action to the risk sentiment. If pessimism gains momentum then a retrace back to the 20-Day SMA at 0.7270 is a possibility, especially with 0.7500 providing formidable resistance. However, rising yield expectations and an improving growth outlook may send the pair higher with a test of resistance at 0.7765-7/15/08 high a possibility- JR