The New Zealand dollar has forged higher against many of its more economically superior and deeply liquid counterparts; but this advance may soon stumble on unstable fundamentals. Over the past month, the kiwi has capitalized on the market’s broad rebound in risk appetite.
New Zealand Dollar Neither A Safe Haven Nor Stable High Yielder
Fundamental Outlook For New Zealand Dollar: Bearish
- First quarter business sentiment ticks to a 34 year low
- REINZ home sales surge 30.5 percent for the first rise in 23 months – a sign of improvement?
- Technical and interest rate forecasts offer conflicted outlook for NZDUSD
The New Zealand dollar has forged higher against many of its more economically superior and deeply liquid counterparts; but this advance may soon stumble on unstable fundamentals. Over the past month, the kiwi has capitalized on the market’s broad rebound in risk appetite. Regardless of the strength of the currency, traders immediately jump on the chance to drive an overdue rebound on the oversold comm dollar. And, while the kiwi was able to break some significant, technical milestones along the way, the further the advance is extended the more vital fundamental fuel becomes. However, considering the economic hurdles the kiwi has to overcome, there is a good probability that the aggressive rally could quickly come crashing down.
Ignoring scheduled event risk and the impact it could have on the fundamental bias to the kiwi for a moment; we should first consider the real backbone behind the recent rally. General risk sentiment has recovered since early March; but the advance seems to be more of a relief rally than an improved outlook for growth and financial market activity. In fact, most market participants are largely in agreement that the global economy has not come through the worst of the slump. What’s more, the health of the financial markets are still fragile. Capital has started to flow back into speculative instruments; but returns are still near recently historical lows (and falling). This means investors are collecting meager returns on the assumption that they will not suffer additional capital losses. However, the most likely scenario for the global market is that we are experiencing a bear market rally that will turn back to the larger trend as earnings shrink and consumption/production trends tumble.
There is little doubt that the kiwi’s primary role in the currency market is as a speculative trade owing to the economy’s volatility and the relatively high yield on the nation’s assets. So, what happens if the reward component for the economy is dampened or completely removed? This is the threat the currency faces over the coming months as market participants try to divine the turn in the global economy and determine which currencies will have rates that pace the rebound in risk appetite. Even in the darkest hour, the New Zealand dollar will be considered one of the most attuned, risk responsive currencies in the market; so a broad rebound in sentiment will benefit the kiwi. On the other hand, should the market base or continue its long-term contraction, the appeal of a high yield will fade as the potential for losses rise. Taking stock of the New Zealand economy and benchmark lending rate, the outlook is dim. The local recession is deepening as the collapse in domestic demand fails to fill in the massive gap left by a growing trade gap. A round of economic date will add to the outlook with a forecasted drop in retail sales and discouraging prognosis for the business PMI activity gauge. Every piece of data that pushes the nation deeper into recession will bring it closer to the downgrade in sovereign debt rating that Standard and Poor’s has warned. The other notable influence next week’s round of data will have is on interest rate expectations. RBNZ Governor has suggested his pace of rate cuts going forward would be less aggressive. However, a bleak outlook from the economy could easily force his hand. Should the CPI release due at the end of the week cool more quickly than forecasted, it would remove a significant obstacle to far lower rates.- JK
Questions? Comments? Send them to John at jkicklighter@dailyfx.com.
