Fundamental Forecast for New Zealand Dollar:Neutral

The New Zealand Dollar was among the worst performing currencies on the week, falling 1.07 percent against the U.S. Dollar and only finishing higher against the Swiss Franc. Much of the downside pressure on the key was due to the fact that higher yielding currencies were offered lower amid a massive sell-off in equity markets on Wednesday, on fears that the Italian bond market would implode, forcing the supranational European body to bailout another indebted Euro-zone nation. As those fears were alleviated later in the week, the Kiwi found support, rebounding off of its lows but still underperforming the majors.

In terms of what is to look forward to the coming week for the Kiwi, there is not much on the docket that could spur significant price action, offering support to the risk-correlated currency. The one release on the calendar to look forward to is the retail sales figure (ex-inflation) for the third quarter. Sales are forecasted to have fallen to a 0.6 percent rate from the previous quarter, in which sales jumped by 0.9 percent.

The trend has been mostly downwards in spending for the island nation, as the forecasted growth rate is almost half of the first quarter’s print of 1.1 percent. The figure is especially concerning given the fact that inflation has cooled off over the past several quarters, mainly due to the global economy slowly deteriorating. Nonetheless, the Reserve Bank of New Zealand has been particularly hawkish the past several weeks, even hinting at the possibility of a rate hike in the future.

Going forward, given the lack of fundamental risk on the calendar, the New Zealand Dollar will follow broad market sentiment and essentially trade off of developments out of the Euro-zone. The key asset to follow would be Italian bond yields. If the 10-year Italian bond yield creeps back over 7 percent, a rally away from the higher yielding currencies – the Kiwi is considered one – and into safer assets would likely occur. As such, if the Euro-zone appears to be getting a grasp on its increasingly problematic debt issues, the Kiwi looks to gain further; however, given our bias towards a global slowdown and a stronger U.S. Dollar in the periods ahead, any gains by the Kiwi will likely be limited should they occur in the week ahead. –CV