NZD/USD Rate Picks up as Risk Sentiment Wanes

February 18, 2011 - Written by John Cameron

STORY LINK NZD/USD Rate Picks up as Risk Sentiment Wanes

Barclays issued an advisory note to investors yesterday urging them to buy the US Dollar against the NZ Dollar, predicting that the US Dollar will strengthen throughout the year as the world economy improves. This suggestion that the strong positive correlation which has been seen in recent times between appetite for risk in world markets and demand for the Kiwi is now weakening will provide concerns for investors holding Kiwi-denominated assets.

However, today’s European trading session has provided evidence that the Kiwi’s role as a risk-sensitive currency remains as strong as ever, for now at least. The US Dollar lost ground overnight following encouraging signs for the domestic economic recovery in the States, including the release of a positive Philadelphia Fed Sentiment Index for February. At the same time, the NZ Dollar gained support in the markets; the Kiwi has now gained the best part of 1.5c against its US counterpart since Wednesday.

On a less positive note, fears still persist that all is not well with the real Economy in New Zealand, with data released during Thursday night’s Asian session in New Zealand causing further jitters in the market. Producer price figures showed an increase in output of 0.2% in the last quarter of 2010, versus an anticipated figure of 1.1%. Meanwhile, February’s ANZ Consumer Confidence Index showed a drop of almost nine points since the January figure.

Looking ahead to next week, the key risk event for the Kiwi comes during Tuesday’s session with the release of the Reserve Bank of New Zealand’s 2-Year Inflation Report. Market participants will look to this figure to provide a pointer on the general state of the NZ economy in the medium term and the future direction of New Zealand monetary policy. The Reserve Bank of New Zealand raised their central bank rate twice last summer to leave rates standing at 3.0% currently. Speculation of a double-dip recession in New Zealand has led to talk in the market of possible rate cuts, which would cause considerable New Zealand Dollar weakness, particularly if other developed economies embark on a rate-hiking cycle.

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