New Zealand Dollar Rally Threatened By Slowing Employment

New Zealand Dollar Rally Threatened By Slowing Employment

Fundamental Forecast for New Zealand Dollar: Bullish

• NZDUSD: Early Signs of Topping Emerge
• NZ Dollar Gains on Business Confidence Data
• Kiwi Gains on Hopes RBNZ to Undo March Rate Cut Sooner than 2012

The New Zealand Dollar extended the advance from earlier this month to reach a fresh record-high of 0.8794, and the high-yielding currency may continue to gain ground in August as the central bank plans to bring the benchmark interest rate back to 3.00 percent. After holding the cash rate steady for the third meeting, the Reserve Bank of New Zealand saw ‘little need for the March ‘insurance’ cut to remain in place much longer,’ and the central bank looks as though it will normalize monetary policy later this year as the recovery gather pace.

At the same time, RBNZ Governor Alan Bollard talked down speculation for a cash rate beyond 3.00 percent, stating that underlying inflation is expected to stay well within the 1-3 percent target range, and went onto say that the marked appreciation in the exchange rate reduces the need for additional rate hikes as it drags on the real economy. In light of the recent comments, it seems as though the central bank will revert back to a wait-and-see approach after unwinding the 50bp rate cut from earlier this year, and Mr. Bollard may adopt a neutral policy stance heading into 2012 as the expansion in global trade appears to be slowing. Despite the balanced tone held by the central bank head, market participants still see the cash rate increasing by more than 100bp over the next 12-months according to Credit Suisse overnight index swaps, and expectations for higher borrowing costs should help to prop up the high-yielding currency in the week ahead as investors weigh the prospects for future policy.

Although the NZD/USD remains heavily overbought, we may see the exchange rate continue to push higher as the relative strength index holds above 70, but the labor report scheduled for the following week could spark a near-term correction in the exchange rate should it dampen the outlook for future growth. Indeed, employment is expected to hold flat in the second-quarter after expanding 1.4% during the first-three months of 2011, while the participation rate is projected to fall back to 68.4% from 68.7% during the same period. As labor growth cools, the data could foreshadow a slowdown in private sector consumption, and the RBNZ may scale back its optimism towards the economy should the data come out worse than expected. - DS