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New Zealand Dollar is at the Front of the Line for a Risk Trend Reversal

 
Fundamental Forecast for New Zealand Dollar: Bearish

  • The housing market takes a hit from sales and prices as financial stress and high rates weigh
  • As the outlook for the US dollar brightens, what does the technical picture for NZDUSD look like?

 

There is a build wave just over the horizon. Risk appetite trends have been coasting with relatively little interruption over the past few months; and the New Zealand dollar has certainly enjoyed the trend. However, fundamental stability is starting to show cracks in different areas across the globe; and the threat of a major collapse in investor sentiment is rising. In the ensuing turmoil that would follow such a shift, there would be a two phase reaction. The first effect would be a panic-like move that would harshly draw a line between those assets that are considered safe havens and those seen as risky with very few securities falling into the former category. In the second stage, after the sense of panic has eased, traders will be more democratic with their assessment of ‘good’ investments. For the kiwi, the panicked stage will have a very clear impact. However, even in the fallout with calmer seas, the currency may still fail to gain significant traction.

 

In benchmarking the threats to risk appetite over the coming week, it is not difficult to highlight the major concerns. At the top of our list (and the top of financial headlines) is speculation that the Ireland will request emergency aid from the EU / IMF EFSF fund. If appealed for, the country would most likely receive support. And, the injection of capital could temporarily curb the dramatic rise in periphery EU economies’ sovereign yields (alternatively, if the bid is not made, these yields will simply continue to escalate). The initial reaction to such of move could very well be calm. However, the lasting effect would be growing concern that the European Union’s financial troubles cannot be contained and the global need for stimulus is too great to answer. That could easily translate into a broad wave of risk aversion.

 

For those that ever wondered why the New Zealand dollar is considered one of the majors – one of the primary reasons is that it offers a relatively high yield on its debt. This currency is a natural investment currency. And, in a market-wide anti-risk drive, the kiwi would certainly suffer. However, even after the high tide passes, the currency would still lag counterparts like the Australian dollar. While the kiwi dollar does have a higher yield than most, it is also starting to suffer greater fundamental troubles. Recently, we have seen a few national banks require government intervention and economic activity has slowed notably. Should we see a global financial crisis; it is very likely that it would exacerbate New Zealand’s domestic problems thereby dampening its ability to recovery and attract capital. This wouldn’t necessarily keep the kiwi from recovery in a global recovery; but if the market is more cautious, it could redirect flows from New Zealand to Australia.

 

Aside from the larger themes threatening to rear next week, we should also keep an eye on the scheduled event risk to garner a sense of the kiwi’s domestic performance. Retail sales, consumer confidence and credit card spending offer a broad look at the health of the consumer sector. The last of those readings will also be useful as a read on the health of the credit markets. The producer prices figures are a prelude to the CPI data; but don’t expect significant market reaction. Also, watch out for commentary to come from the RBNZ governor or perhaps key political officials should the markets start rocking.



Disclosure: Disclosure: No position in stocks mentioned