Deteriorating fundamentals dragged on the New Zealand dollar this week as the unemployment rate spiked to its highest level since 2003, and may face further headwinds over the coming week as the economic docket continues to reflect a dour outlook for the $128B economy.
New Zealand Dollar Outlook Remains Bearish As Rate Expectations Fall
Fundamental Outlook For New Zealand Dollar: Bearish
- New Zealand Unemployment Rate Increases to 4.2% from 3.9% - Demands for Carry Trades Remain Subdued as Global Interest Rates Decline
Deteriorating fundamentals dragged on the New Zealand dollar this week as the unemployment rate spiked to its highest level since 2003, and may face further headwinds over the coming week as the economic docket continues to reflect a dour outlook for the $128B economy. In addition, fading interest rate expectations could also stoke increased selling pressures for the high-yielding currency as market participants expect the Reserve Bank of New Zealand to aggressively cut borrowing costs well into the next year.
Fears of a severe recession paired with the lack of improvement in the financial sector has certainly raised expectations that RBNZ Governor Alan Bollard will increase efforts to stave off further downturns in the economy, and could be forced to cut the key interest rate well into 2009 as fears of a global meltdown intensify. Credit Suisse overnight index swaps are showing that market participants are becoming increasingly bearish against the New Zealand dollar as they now expect the central bank to lower the benchmark interest rate by at least 150bp over the next 12 months amid expectations for 100bp worth of expected cuts last week. Fading demands from around the world paired with falling commodity prices have clearly weighed on the growth outlook, and conditions may only get worse over the coming months as the major economies around the world teeter on the brink of a recession. Furthermore, as the economic outlook for the global economy turns bleak, investors may continue to unwind their positions in high-yielding assets, which would only limit demands for carry traders in the near-term.
Moreover, as New Zealand slipped into a recession during the first half of the year, the economic data scheduled for next week will certainly provide a clearer picture in what to expect from the RBNZ, and is likely to spark volatility for the kiwi. A pullback in producer prices paired with a decline in retail spending would only strengthen the argument for the central bank to increase their efforts, which could lower interest rate expectations even further as Governor Bollard continues to hold a dovish outlook. - DS