Outlook for New Zealand Dollar: Upside Risks to NZD Grow as NZ Economic Data Strengthens
The New Zealand Dollar (Currency:NZD) has suffered a reversal of fortunes through the course of Monday's trading session. (See the levels at 08.50 in our Live Coverage).
Initially the New Zealand Dollar was well supported: "The New Zealand dollar rose to a two-month peak against the U.S. dollar after a batch of strong domestic economic data suggested the RBNZ could be the first of the major industrialised central banks to raise rates. Strong Chinese economic data added to the kiwi’s upbeat tone this morning," says a currency note from Commonwealth Foreign Exchange.
Equity markets have moved into the red at the start of the US trading session; and this has in turned pressured the high-yielding New Zealand currency.
Outlook for the New Zealand dollar remains positive
Despite this afternoon's blip, the New Zealand currency remains in favour.
Greg Gibbs at RBS says the strength of the NZ economy poses upside risks for the NZ Dollar:
"Recent activity indicators have been surprisingly strong, despite some cooling in the housing market. This suggests that strength in activity is broadening and increases the odds that the RBNZ will hike rates early next year.
"New Zealand rates have backed up significantly since 25 July. 64bp of hikes are priced by mid-2014 and 86bp over the next 12 months. On the recent improvement in NZ activity indicators it is hard to argue against the upswing in NZ rates, although much may yet depend on the implementation of LVR restrictions and global markets.
"It is difficult to judge how the market will interpret Wheelers speech on Tuesday, but recent broader economic recovery suggests risks of further rebound in the NZD
"While there may be some recent evident that the housing market is calming down, the broader economy appears to have gained momentum. Several indicators reported in the last week are running quite hot, suggesting that regardless of the cooling in the housing market, the RBNZ may need to hike rates sooner rather than later."
China poses upside risk to New Zealand and Australian Dollars
On the fundamental front, further impetus will be afforded to both the New Zealand and Australian Dollar's should Chinese data continue to improve.
Kathy Lien at BK Asset Management says:
"Across the Pacific, we get the first glance of August Chinese manufacturing PMI numbers on Thursday. While the economy slowed in June, economic data improved in the month of July and it will be important to see if those improvements continued into August.
"Economists are looking for a stronger number and if they are right, the AUD and NZD could extend their gains but if they are wrong and July proved to be a one-month bounce, it is back to the range for both currencies."
New Zealand Dollar versus Euro: Consolidation in progress
Concerning the New Zealand Dollar versus Euro technical outlook, Imre Speizer at Westpac says:
"The three-month old consolidation remains in progress, next targeting 0.62. EUR is proving oddly weak despite clear signs that activity across the region is stabilising (e.g. ZEW survey, Q2 GDP) and despite further steady in sovereign risk premiums.
Longer term we still expect EUR/NZD to break down given more severe structural headwinds to growth in the Eurozone vs NZ (e.g. bank deleveraging, lack of credit demand, austerity) and the still combustible peripheral environment which should include a new Greek bailout later in the year. The European calendar’s releases to watch for this week include regionwide advance PMIs for August.
Outlook for the NZ Dollar versus British Pound
Speizer says:
"The two-month long consolidation continues, 0.50-0.53 the range. Longer term, economic data has been strong, helping prop up the GBP. However, interest rates have also risen in response, potentially hurting the economy, and that may prompt the BOE to consider increasing its QE program. All else equal, NZD/GBP should rise. The UK calendar this week contains only minor data for market."