New Zealand Dollar Threatened By Risk Aversion, Rate Decision

Published March 8th, 2009 - 11:15 GMT

The New Zealand Dollar outperformed the other major currencies last week, adding 1.97% against its US counterpart. However, bullish momentum will meet considerable hurdles in the week ahead as continued risk aversion is compounded by a deep interest rate cut from the Reserve Bank of New Zealand.




New Zealand Dollar Threatened By Risk Aversion, Rate Decision

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The New Zealand Dollar outperformed the other major currencies last week, adding 1.97% against its US counterpart. However, bullish momentum will meet considerable hurdles in the week ahead as continued risk aversion is compounded by a deep interest rate cut from the Reserve Bank of New Zealand.

Looking first to the interest rate decision, the central bank is expected to issue a hefty 75 basis point cut to bring borrowing costs to 2.75%, the lowest since the benchmark lending rate was introduced in 1999. The growth and inflation outlooks are supportive of further easing: the RBNZ has lowered its 2-year forecasts of both price and GDP growth, slashing the former to a 5-year low of 2.3% and saying the latter will expand just 0.1%. The bank added that unemployment is set to rise to 6%, the highest since June 2000. Bond yield forecasts suggest monetary easing will continue beyond the March policy announcement, calling for rates to decline to 2.25% by the second quarter and stay there through the end of 2009. Most major central banks are at or near the end of their easing cycle, putting the RBNZ behind the curve and pressuring the New Zealand Dollar lower against those currencies where rates have nowhere left to go but up.

Turning to risk sentiment, the current environment is likely to continue to favor safe-haven assets as the market looks back and reacts to a number of key news items that were pushed into the background by the Non Farm Payrolls report at the end of last week. First, it was revealed that the US administration’s mortgage rescue plan would effectively be confined to loans owned by Fannie Mae and Freddie Mac, leaving banks like Wells Fargo (which owns 16% of the mortgage market) in the cold. Second, Moody’s downgraded JPMorgan, the heretofore bastion of strength amid the wave of banking sector instability. Finally, the chairman of the FDIC said its deposit insurance fund may become insolvent by the end of this year, threatening the already shaky financial system with a widespread bank run. The New Zealand Dollar is currently 96% correlated with the MSCI World Stock Index, so if the dismal news flow sinks share prices the Kiwi is set to come along for the ride. - IS

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