The New Zealand Dollar price action is likely to follow the same pattern as its Australian counterpart, with selling pressure in place as traders price in the looming contraction in yield spreads.
Fundamental Outlook For New Zealand Dollar: Bearish
- New Zealand economy loses last support as commodity export prices shrink
The interest rate announcement from the Reserve Bank of New Zealand and the July Retail Sales report stand out on a calendar packed with second-tier releases. Alan Bollard and company are expected to issue another 25-basis-point rate cut, bringing benchmark borrowing costs to 7.75%. Bollard was blunt in outlining the bank’s trajectory at the previous policy meeting that saw rates lowered to 8.00%, saying that “monetary policy has been reasonably tight for some time, and is now restraining activity and medium-term inflation pressures. Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower [interest rates] further.” Bond yield forecasts call for 150 basis points into total cuts over the course of this and next year, bringing rates to 6.25% in the fourth quarter of 2009.
Retail Sales are likely to see lower readings in July. The positive result in June’s headline metric (0.9%) owed entirely to higher fuel costs: the core reading produced a flat result at 0.0%. Crude oil prices eased substantially in July, opening the door for the headline figure to be more representative of the dire state of consumer sentiment in the smaller antipodean nation.
All told, New Zealand Dollar price action is likely to follow the same pattern as its Australian counterpart. Recent weeks have seen high-yielding “carry” currencies lose ground across the board, setting off sweeping reversals of multi-year trends across the forex market. These flows are likely to keep the New Zealand Dollar under pressure as traders price in the looming contraction in yield spreads.
