Weekly Forex & Interest Rate Outlook

With the removal of US debt default risks for the next few months at least, NZD/USD should be free to express the rebound in global risk sentiment as well as NZ’s own strong economic outlook.

The NZ CPI release last week confirmed inflationary pressures are starting to build, and that should eventually require an interest rate response from the RBNZ. As for the US dollar, it has surely has sustained some long term damage by the fiscal bickering of US politicians which threatened to cause a debt default. In addition to concern among foreign bondholders, Washington’s dysfunction acts as a brake on US

growth, damaging the economy both directly and indirectly via confidence channels. What’s more, we may see it all over again in January and February 2014 when new agreements need to be struck. That suggests that Fed tapering may not be a serious chance until well into 2014, possibly Q2 at the earliest. Thus door is wide open for risky currencies, such as the NZD, to rally further against the US dollar into year end. The March high of 0.8676 is a major target, but before that, the 0.8555 to 0.8585 area may prove sticky.