NZD USD – October Outlook

Confirmed downtrends on the daily and weekly charts indicate that it is just a matter of time before the monthly NZD USD also turns lower. Like the AUD USD, the New Zealand Dollar/U.S. Dollar currency pair is also in a position to form a yearly closing price reversal top. This is a clear indication that the problems in Europe and the shedding of risky assets are hitting the Pacific Rim area of the globe pretty hard.

Besides its close correlation to the falling equity markets like the Australian Dollar, the currency also remains sensitive to speculation that the Reserve Bank of New Zealand has ended its tight monetary policy and may now be embarking on a series of interest rate cuts over the next year. With Kiwi traders no longer pricing in any interest rates hikes for the coming year, traders have turned their focus on the volatility created by the instability in the financial markets and the lingering sovereign debt crisis inEurope.

The best way to approach the NZD USD at this time is to watch the movement in the global equity markets because of their strong correlations. Short-term volatility could be up in October if the equity markets continue to gyrate with wild, whip-saw movement. Although there may be a few sizable rallies, gains are likely to be limited because of the central bank’s return to a loose monetary policy.

Although the Reserve Bank left the Official Cash Rate unchanged at 2.5 percent in September, it did so knowing that the New Zealand economy had performed relatively well despite a slight increase in headline inflation. At the same time, the central bank felt some exposure to the increasing global and economic risks.

Domestic economic activity was surprisingly high, but the outlook for New Zealand’s trading partners deteriorated. This sent a clear signal that there is now a real risk to the New Zealandeconomy from a slow down in global economic activity. For a country that relies heavily on trade, sovereign debt concerns inEurope, the tightening of international bank lending and the slowing of the global economy are causes of major concern.

If global developments improve and the impact on Zealand economy is minimal, then one could build a case for another round of tightening. However, if the lingering problems in Europe intensify, putting the global economy and financial community at risk, then it may be prudent for the RBNZ to continue to hold its key interest rate steady at 2.5 percent. The one move the central bank doesn’t want to make is a premature rate cut because of inflationary concerns.

At this time, the New Zealand economy appears to be holding steady while making progress in several sectors that were hit hard by the devastating earthquake earlier in the year. The economy is expected to remain on track as long as the sovereign debt crisis in Europe remains somewhat contained. Besides losing business because of weakening financial conditions, the New Zealand economy could also face a serious increase in funding costs should the debt crisis drive up lending rates. This could hurt New Zealand’s outlook for a full economic recovery.

In summary, technically it looks as if the NZD USD has reached a major top; however, the market still remains sensitive to gyrations in the equity markets. A strong recovery in the global equity markets could lead to a short-covering rally during October. Without the boost from a hike in interest rates, a rally in this currency pair may be short-lived. With the problems in Europe still a major concern and not likely to go away over the near-term, speculators may be better off waiting to short a retracement rather than trying to capture both side of the market.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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