New Zealand Dollar May Struggle as Focus Shifts to the Economy

The New Zealand Dollar may struggle to retain last week’s bullish momentum as a series of high-profile economic data releases sees currency traders shifting their focus away from risk appetite to the dismal state of the economy.

New Zealand Dollar May Struggle as Focus Shifts to the Economy

Fundamental Forecast for New Zealand Dollar: Bearish

- Moving Average Marks New Zealand Dollar Resistance Against AUD
- Speculative Sentiment Points to Continued NZDUSD Strength Ahead

The New Zealand Dollar may struggle to retain last week’s bullish momentum as a series of high-profile economic data releases sees currency traders shifting their focus away from risk appetite to the dismal state of the economy. The Trade Balance report is set to show a monthly surplus of NZ$215 million, a sharp reversal lower from the previous month’s record-setting NZ$858 million result and the narrowest reading in positive territory in 5 months. A sharp drop in exports is expected to be the driving force behind the decline, with outbound shipments forecast to drop -14.1% while imports register a modest 3.2% increase. The currency is the likely catalyst behind this dynamic: the Kiwi gained nearly 1% in June after jumping 8% in the previous month, making New Zealand’s goods comparatively cheaper for overseas buyers while boosting domestic purchasing power of foreign products. The release will surely remind the markets of New Zealand’s credit outlook downgrade by Fitch, which cited the “persistently large current account deficit” as a reason for concern about the country’s medium-term growth outlook.

The Reserve Bank of New Zealand’s interest rate announcement later in the week could also present a disappointment. The bank is expected to leave interest rates unchanged at 2.5%, with RBNZ chief Alan Bollard arguing that New Zealand is likely to recover faster than its main trading partners and building expectations that borrowing costs have hit a floor, at least for the time being. The markets appear to be taking him at this word for now, with overnight index swaps pricing in virtually no chance of further reductions this time around. That said, a sharply dovish turn in rhetoric (if not a surprise reduction) would seem reasonable: creating expectations of lower yields could put downward pressure on the New Zealand Dollar and help with adjusting the external deficit as well as offer additional stimulus at a time when the government has scrapped tax cut plans on fears of the ballooning public debt. The current low inflation environment seems to make such a move relatively safe; indeed, Bollard himself has acknowledged that price growth will fall below the 1-3% target range this year.

Finally, risk trends are certainly not guaranteed to be out of the picture despite signs of waning influence in recent days. Short-term studies continue to show a hefty 85.3% correlation between the New Zealand Dollar and the MSCI World Stock Index, leaving the door open for risk appetite to retain its place as a primary catalyst for directional momentum.