Fundamental Outlook For New Zealand Dollar: Bearish
- Fourth quarter manufacturing activity unchanged while sales plunge 5.4 percent
- Service sector activity contracts yet again as sales, employment and orders slide
- Credit card spending contracts for the fifth consecutive month on a year-over-year basis
The New Zealand dollar rallied across the board over the past week as fundamental weakness in some of the kiwi’s major counterparts helped leverage a derivative rebound in risk appetite. Fear, however, is still an indelible element to all markets; so strength in risk-sensitive instruments like the New Zealand currency could soon sputter without a real grounding in fundamentals. This means that either the market will need to see risk dissipate and appetite for yield rise; or the kiwi will need to find fuel to sustain its budding bull trend. Looking at data scheduled for release next week and the lingering macro events on tap, this com bloc staple could finally see a significant retracement of its aggressive two week advance.
As has been the case for months, the most influential and lasting driver of kiwi price action going forward will be the broader appetite for risk. Typically, these trends are ill-defined by schedules and have recently followed the intensity of global financial strains matched against policy officials’ ever-growing efforts to stabilize the markets. Over the coming week, the focus on the balance in fear will intensify leading up to the April 2nd G-20 meeting. Policy officials have been constantly putting out fires in their own economies; and the focus will likely be on the Euro Zone and US through the immediate future. The EU recently announced it would extend its credit line to those members in financial stress to 50 billion euros and was working out an individual bailout loan for Romania – helping to dampen fears that the Eastern European states could fall into bankruptcy and take the Euro Zone with it. A curve ball to keep an eye on is Switzerland. With SNB President Roth’s comments that the Swiss franc cannot afford to appreciate any further, protectionism may get in the way of a global rescue effort that could ultimately call an end to the now, 19-month old crisis.
Typically, the New Zealand dollar is merely caught up in the risk winds generated by its larger, industrialized counterparts; but this week we could actually see the country’s fundamentals actually contribute to the currency’s development. Major economic releases are scheduled for release; and topping the list is the 4Q GDP report. This indicator will force the market to take a critical look at the New Zealand dollar as a risk-sensitive currency and high yielder. It has been the rule of thumb for years that the New Zealand currency rallies when the market is seeking out higher returns because the small economy relieves most of its capital inflows through investment channels as market participants take advantage of the nation’s relatively high yields. However, the benchmark has come down quickly (pulling down rates of return on investable assets with it); and RBNZ Governor Bollard hasn’t officially brought an end to his dovish regime yet. Should data confirm economy shrank 1.1 percent over the quarter for its fastest decline since early 1991, it will severely undermine the hope for outsize returns from New Zealand investments. The same can be said of the current account balance through the same period and more timely trade and consumer sentiment readings. With global rates near the same low level across the world, the potential for higher rates of return down the line is largely dependent on growth. Lacking liquidity, reasonable expectations of return and even financial stability; Australia could end up being an appealing alternative to all the flows New Zealand used to earn. -JK
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