New Zealand Dollar To Hold Range Ahead of 3Q GDP

The New Zealand Dollar tumbled lower this week, but continued to maintain the broad range carried through from the end of November, and the high-yielding currency is likely to face increased volatility following the 3Q GDP report due out on Tuesday as economists forecast the $128 economy to expand at a faster pace in the second-half of 2009.

Meanwhile, Credit Suisse overnight index swaps are up 203bp at the moment after rising as much as 226bp during the previous week, and the pull back in the interest rate outlook may drive the exchange rate lower going into the following year as the Reserve Bank of New Zealand pledges to hold the benchmark interest rate at the record-low throughout the first-half of 2010.

Nevertheless, New Zealand’s growth rate is forecasted to expand 0.4% in the third quarter after unexpectedly increasing 0.1% during the three-months through June, while the annualized rate is projected to contract 1.3% from the previous year after tumbling 2.1% in the second quarter. Moreover, the current account is anticipated to record a deficit of 2.030B for the third quarter after posting a 0.124B surplus during the previous three-month period as global trade conditions remain subdued, and the marked appreciation in the exchange rate may continue to weigh on the real economy as it hampers the prospects for an export-led recovery. However, as risk trends continue to drive price action in the currency market, a rise in risk appetite is likely to drive the New Zealand dollar higher as market participants move into higher-yielding investments. At the same time, the shortened trading week ahead of the Christmas holiday is likely to spur increased volatility in the exchange rate as market liquidity tapers off, and there is a risk that we will see erratic movements across the major currencies as we head into the New Year.

David Song