DailyFX.com - New Zealand Dollar Weakness to Persist as Fed Rates Outlook Firms

NZDUSD [2HR – 08/22/2014] Chart created using FXCM Marketscope

Fundamental Forecast for New Zealand Dollar: Bearish

  • NZ Dollar to be Driven by Macro Themes, Fed Rates Outlook in Focus
  • Upbeat US Economic Data May Boost US Tightening Bets, Sink Kiwi
  • Help Identify Critical Turning Points for NZD/USD with DailyFX SSI

A lull in high-profile domestic news-flow puts external forces in the spotlight as the primary drivers of New Zealand Dollar price action in the week ahead. The central issue on this front continues to be the evolution of the expected time gap between the end of the Fed’s QE3 asset purchases in October and the first subsequent interest rate hike.

The formative role of US monetary policy in supporting risk sentiment is hardly controversial at this point; one need only compare the five-year trajectory of the S&P 500 and the US central bank’s balance sheet to see it. As stimulus helped build out the risk-on rally since the end of the 2008-09 crisis, so too a shift toward a more hawkish posture may undermine it.

As the highest-yielding currency in the G10 FX space, the Kiwi stands out as particularly vulnerable if risk appetite unravels and capital flees return-oriented assets for safer shores. The prospect of a sooner-than-expected start to Fed tightening may trigger just such a dynamic.

The Fed notably upgraded its language on inflation in July’s FOMC statement, saying the “likelihood of inflation running persistently below 2 percent has diminished. This tone shift and its supportive implications for the possibility that stimulus removal will begin relatively sooner than otherwise was further brandished in minutes from last month’s sit-down as well as Fed Chair Yellen’s comments at the Jackson Hole Economic Symposium.

The week ahead brings ample opportunities to build on this narrative, with a flurry of US economic data releases due to cross the wires. July’s Home Sales and Durable Goods Orders as well as Augusts’ Markit PMI and Consumer Confidence figures are all on tap. In trend terms, the performance of US economic news-flow has markedly improved since early April. Indeed, a Citigroup index measuring realized outcomes relative to consensus forecasts now shows data results are outperforming expectations by the widest margin in six months. This hints that analysts are underestimating the vigor of the US economy, opening the door for upside surprises on upcoming reports that amplify Fed rate hike bets and punish the Kiwi further.

Related Articles
  1. Investing News

    China’s Forex Reserves Dropped Significantly

    China’s forex​ reserves dropped by a record $93.9 billion at the end of August to $3.56 trillion because the Central Bank has been selling dollars to provide a cushion to the falling yuan​
  2. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  3. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  4. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  5. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  6. Investing

    Financial News Comparison: Bloomberg Vs. Reuters

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  7. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
  8. Forex Education

    The Top Uses For P2P Currency Exchange

    Peer-to-peer (P2P) currency exchange networks offer a viable and cheaper alternative for buying and selling currencies.
  9. Forex

    Steps To Open An Offshore Forex Account

    Here is a simple breakdown of how to open an offshore forex account for US-based users, including legal requirements.
  10. Entrepreneurship

    Top Forex Trading Apps

    A brief overview of the top apps that help forex traders with on time information, charts and more.

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!