Fundamental Forecast for New Zealand Dollar: Neutral
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The New Zealand Dollar had a strong week (despite some rather uninspiring price action early in the week) finishing as the second best performer overall, only losing 0.36 percent to the Australian Dollar. The Kiwi’s performance against most of the majors, loosely speaking, was fairly muted; but for the US Dollar, which was the worst performer and lost 1.35 percent to the New Zealand Dollar, all of the other majors depreciated by 0.65 percent or less against the Kiwi. Indeed, it was the US Dollar dump on Friday that instigated a large part of the Kiwi’s performance, but after a more hawkish than expected Reserve Bank of New Zealand a few weeks back alongside an outstanding first quarter GDP print, the Kiwi’s fundamental posture is bullish in the short-term.
With that said, there’s many exogenous forces influencing the Kiwi’s behavior recently; its driving fundamentals are less about what’s going on in New Zealand and more about what’s happening halfway around the world. The very short-term solution to the Euro-zone crisis alongside further mediocre US data has provided two things that have stoked high beta currencies and risk-correlated assets such as the New Zealand Dollar: the implication that European countries will back away from the edge of default, allowing capital to be moved off the sidelines in what has become a relatively more clear investing environment; and the fact that as long as the US economy remains in the doldrums (we’re nearing the point of it becoming fashionable to say the US economy is headed towards a recession), the Federal Reserve will watching with its finger on its QE3 trigger.
This week’s economic docket is exceptionally thin for New Zealand, with only one ‘low’ importance event on the docket and zero ‘medium’ nor ‘high’ importance events evident, according to the DailyFX Economic Calendar. Historically, the ANZ Commodity Price report has done little to move the Kiwi (if ever) so it’s not worth expanding on beyond this sentence. Instead, we must continue to stress the significant influence that the Euro-zone crisis has on the New Zealand Dollar, and it is of that relationship – the world’s foremost underlying driver of risk sentiment – that the Kiwi will find its place in one week.
To wit: On February 6, Moody’s Investors Service said that the New Zealand economy was among the “most exposed” to the crisis, further noting that its banking system (along with Australia’s and Korea’s) is “more vulnerable to the first-round impact of a further worsening of the euro area crisis than other systems in Asia Pacific.” Indeed, since mid-March, when the Euro-zone crisis started reheating, New Zealand 5-year CDS have climbed over 36 percent, from 65.98 to 90.00 at the time of writing today. This is still much improved from its peak this year, when it climbed as high as 109.00 in early-June. Nonetheless, when Euro-zone issues come back – we’ve seen leaders’ attempts to stabilize markets fail in October and November 2011, late-February and early-March 2012, and then again after the Spanish bailout in June 2012 – the New Zealand Dollar will be most exposed. Because the return of these concerns could be anytime from the start of trading in July to a few weeks later, we remain cautiously bullish on the Kiwi but choose a neutral stance for the week ahead. –CV