Headwinds remain for the NZ dollar

Headwinds remain for the NZ dollar

By Garry Dean (Sales Trader, CMC Markets New Zealand)

The New Zealand dollar has benefitted overnight from a rally in risk assets as the weekend’s Crimea referendum passed without major violence. The 97% vote in favour of joining Russia was not recognised by the US, Ukraine and the EU. However the sanctions they imposed following the result were very modest. This saw an unwind of defensive plays, with equities posting strong gains, treasuries weakening, and the safe-haven Yen giving up some recent gains. Against this backdrop the NZD has rallied overnight to a high of 0.8583, and retested major trend-line resistance from the 0.8845 high seen in July 2011.

We saw the NZD break 0.8600 briefly last Thursday, (with a new post-float high reached in the Trade Weighted Index) in reaction to the RBNZ 0.25% OCR hike and prospects for at least another 1% increase this year. With other major central banks continuing with near zero interest rates, the widening interest differential is clearly supportive for the NZD. That said, investors have seen the headwinds created by the geopolitical tensions in Ukraine, and this has the potential to be a concern for some time. Continued weakness in Chinese data is also clearly a concern for both the AUD and the NZD going forward, as is the prospect that FED chairman Janet Yellen will proceed with a reduction in the FED’s monthly bond buying programme. Thursday’s FOMC meeting will be the first led by Yellen since succeeding Ben Bernanke last month, and she is likely to reduce monthly bond purchases by a further $10 bio to $55 bio a month. These factors should provide continued resistance in the 0.8580 -0.8600 window, and one would need to see a weekly close above this window before becoming too positive on future gains. Short-term support is seen at 0.8525 and 0.8505.

Local NZ economic data this week includes Q4 Current Account on Wednesday and Q4 GDP on Thursday. The current account deficit is expected to show a decline to $1.4 bio, or 3.3% of GDP, with Q4 GDP expected to have increased 0.9%. The release of the March RBA minutes today will also be of interest, particularly given the strength in the February employment numbers seen last week.
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