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New Zealand Dollar Weekly Outlook: Risk Aversion, RBNZ Rate Decision Threaten, But A Bounce May Come

 

NZD/USD DAILY AVAFX CHART   25 JAN 22

Summary

New Zealand Dollar Bias: Bearish

-    Events: Mon-Credit Card Spending y/y, Wed-RBNZ Official Cash Rate, Thurs- Trade Balance, building Permits m/m

-    New Zealand Dollar falling with other risk currencies on risk aversion

-    NZDUSD Technical Forecast bearish on a hold below 0.7240

Analysis

As we have warned in the past, the New Zealand Dollar has moved up with the Aussie while lacking the corresponding fundamental strength, making it ripe to fall especially hard when risk aversion returned.

Thus not surprisingly, the New Zealand dollar was the worst-performing G10 currency in the prior week’s trade, falling sharply on similarly dramatic pullbacks in the US S&P 500 and other key risk barometers. A marginally disappointing New Zealand Consumer Price Index release likewise led to modest short-term drop, hurting interest rate forecasts just a week ahead of the highly-anticipated Reserve Bank of New Zealand rate announcement. This RBNZ Cash Rate announcement will likely be the biggest New Zealand Dollar mover in the week ahead, though any major  shifts in financial market risk sentiment are likely to override it.

As usual, the surprises are more likely to come from substantive changes in rhetoric from the NZ central bank. RBNZ Governor Alan Bollard had previously estimated that the bank would begin raising interest rates through late 2010, but he recently suggested that monetary policy tightening could come as soon as mid-year. The modest disappointment in Q4 CPI data forced a pullback in rate hike expectations and Overnight Index Swaps pulled back accordingly. Traders should pay especially close attention to any references to the timing of rate increases. The yield-sensitive New Zealand Dollar will likely respond sharply to any suggestion that rates will be hiked sooner or later than market forecasts.

Again, however, the key remains to monitor the US S&P 500 and broader financial market risk sentiment. Given a US Federal Open Market Committee interest rate announcement due this week, US financial markets may prove especially volatile on any surprises from the Federal Reserve. The past week’s sharp pullbacks certainly warn that this may be the start of a larger correction, and indeed it seems that NZD risks remain to the downside through recent signs of financial market turmoil.

Disclosure: No positions