Why the New Zealand dollar could bounce this week - DailyFX Tips & Picks

With euro-dollar now turning a little stale, it’s worth shifting our focus onto the New Zealand dollar.

Heading into the Reserve Bank of New Zealand interest rate meeting this week, New Zealand dollar-dollar is down by roughly 8.5 per cent since its April high. The backdrop for this decline has been expectations of a rate cut; economists are giving a 37 per cent likelihood of a cut at this week’s meeting, which is mimicked by Overnight Indexed Swaps (OIS) market expectations. Looking over the next 12 months, the OIS markets expect the Reserve Bank to cut interest rates by almost 50 basis points. If it does happen, it would entail cuts of 25 basis points over two separate meetings.

We see this long-term view of the market as fairly valued given the softer New Zealand inflation readings and the weaker labour market. However, we also see the markets as a little stretched in the near term and they will potentially bounce if we do not get a cut this week.

If we indeed get a bounce to the $0.73 to $0.75 area over the next few weeks, we would see this as an opportunity to short in line with the bearish fundamental and technical trend. The biggest risk to this outlook is a quickening in inflation, which should reduce the potential rate cuts to just 25 basis points. On the flipside, Friday’s US non-farm payrolls were an all-round good report and should counteract a strong New Zealand dollar-dollar bounce. Our near-term target for New Zealand dollar-dollar is $0.70.

Alejandro Zambrano is a currency strategy analyst at DailyFX.