New Zealand Dollar Closes Near 2009 Highs – When Will it Turn?
Fundamental Forecast for New Zealand Dollar: Bearish
- New Zealand Prime Minister seeks ‘Single Market’ with Australia
- Finance Minister says New Zealand to avoid ‘profligate’ fiscal spending
- New Zealand Producer Prices flat after two quarters of deflation
The New Zealand dollar started the week sharply lower on similar pullbacks in the US S&P 500 and risk sentiment, but a later reversal leaves the NZD at its highest weekly close on a year-to-date basis. Last week we claimed that the currency may have set its highest levels for 2009 following its pronounced correction. Yet markets seemingly have other things in mind, and the sheer strength of the global equity market rally gives us pause in our NZD-bearish assessment. We have argued (and will continue to argue) that the New Zealand Dollar is at major bullish sentiment extremes—making a turnaround inevitable. Yet, to borrow a heavily-overused quote from famed economist John Maynard Keynes, “The market can stay irrational longer than you can stay solvent.” Limited event risk in the week ahead suggests volatility may slow, but that hardly rules out further New Zealand dollar rallies.
Markets are unlikely to force any major NZD moves on either RBNZ Inflation Expectation survey results or the upcoming Trade Balance report, but the former could have implications for the future of domestic interest rates. Currency traders have largely ignored shifts in interest rate forecasts for the Euro, US Dollar, and other key currencies. Yet relatively high domestic yields remain a source of New Zealand Dollar demand, and we should keep a close eye on sharp shifts in Reserve Bank of New Zealand interest rate forecasts. Given that the RBNZ explicitly targets inflation within a range of 2-3 percent, any especially surprising results could move NZD yields and the currency itself. Otherwise, it may be important to keep a lookout for unexpected results out of the mid-week Trade Balance report.
(The concluding paragraph is, tellingly, unchanged from last week’s New Zealand Dollar forecast report.) Our aggressively bearish New Zealand Dollar forecasts have clearly proven premature on substantial rallies in global risky asset classes. Yet we remain committed to our calls for a sustained NZDUSD and NZDJPY pullback on clear sentiment extremes. The key difficulty remains the timing of such pullback. Calling for an NZDUSD turnaround 400 pips too early has clearly put a dent in this author’s credibility (and track record). At the end of the day, however, the pair can’t continue going higher forever – can it?- DR
