fxmatters

After a period of conflicting pressures, the stars appear more aligned at present; namely pointing to downward for the NZ dollar.

1) There is the RBNZ policy review next week. The market is pricing midway between a 0.25% and 0.50% rate cut. This pricing between now and the 30th is likely to err more towards a 0.5% rate cut – one drag on the NZD near-term, especially for the NZD/AUD.

2) There is likely to be focus in the lead-up to the 28-May Budget on difficulties faced by NZ. These were highlighted last week in the OECD NZ Economic Survey:

“… among the most indebted in the OECD”

“Although the quality of New Zealand’s regulatory regime is generally high,
it has fallen relative to other OECD countries”

The conflicting threats of credit rating downgrade should the government spend too much, and further monetary easing should the government restrain spending too much are likely weigh on the NZD.

3) The RBA and Australian government have a similar interplay ahead, with a budget 12-May and RBA reviews 5-May and 2-Jun. The net effect will be focus on an Australian recession and another RBA easing; a drag on the AUD (and hence on the NZD/USD).

4) The ECB is also likely to cut interest rates again 7-May, including presenting a quantitative easing policy. This is likely to weigh on the EUR (and hence on the AUD/USD and NZD/USD).

5) More significant than all the above, the global ‘green shoots’ optimism will have been sorely dented by sharp share price falls last night. Further forecasts and news to come of recession and the 4-May US banks’ stress test results will likely provide a further check to recent optimism.

This is not to say that the global recovery story and an upward trending NZD need not be a key theme of 2009. They most likely will be but now does not appear to be the right time. Importers may wish to guard against a sharp NZD fall in the next month. Exporters would do well to look for buying opportunities – a NZD/USD around 53-54c appears a reasonable starting point.