New Zealand Dollar Looks to Consumer Price Index Report

New Zealand Dollar Looks to Consumer Price Index Report
Fundamental Forecast for New Zealand Dollar: Bearish


The New Zealand dollar pulled back from the monthly high (0.7199) to hold along the 100-Day SMA at 0.7107, and the lack of momentum to retrace the decline from earlier this year could lead the exchange rate to test the lower bounds of its recent range over the following week as it maintains the downward trend from the 2009 high (0.7636). At the same time the economic docket is expected to show consumer prices rising at an annual pace of 2.3% in the first quarter, which would be the fastest pace of growth in a year, and the rebound in price growth may lead the Reserve Bank of New Zealand to normalize policy further over the coming months as the central bank aims to balance the risks for the economy.
However, as households continue to face the ongoing weakness in the labor market paired with tightening credit conditions, the RBNZ is widely expected to maintain a dovish policy stance at its next rate decision on April 28, and Governor Alan Bollard may look to support the economy going into the latter half of 2010 as the economic recovery remains “relatively sluggish.” Credit Suisse overnight index swaps are 162bp higher this month after rising 181bp in March, with investors pricing a four-percent chance for a 25bp rate hike this month, and the drop in interest rate expectations may continue to drag on the exchange rate as market participants weigh the prospects for future policy. In addition, uncertainties surround the global economy paired with speculation for tightening policies in China could weigh on market sentiment over the following week, and a rise in risk aversion would drive the exchange rate lower as the reserve-currency continues to benefit from safe-haven flows. Nevertheless, a Bloomberg News survey shows 13 of the 14 economists polled forecast the RBNZ to hold the benchmark interest rate at 2.50% this month, and dovish comments following the rate decision is likely to stoke a drop in interest rate outlook as Governor Bollard expects inflation to hold within the 1-3 percent target in 2011. - DS

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