Weekly Forex & Interest Rate Outlook

The NZD looks set to underperform during the week ahead with the RBNZ likely to sound a more dovish note.

A less hawkish RBNZ will probably push market pricing for the first hike from March 2014 to April 2014. The resultant fall in NZ interest rates should in turn push NZD/USD lower. Near term NZD momentum has already flipped to negative, so the downward correction which started last week risks extending to 0.8200. Longer term, though, though, we target 0.8600 by year end. We remain constructive on NZD/USD, given strong NZ fundamentals and broad USD weakness. The USD has suffered structural damage from the Washington fiasco. Fed tapering is not a realistic chance until Q2 2014 at the earliest and even that may be over-optimistic – a decent reading of the US economy will not be available until Feb/Mar 2014 and that is assuming another round of brinksmanship in Congress is averted early in 2014. Moreover, the trend in private payrolls points to a considerable cooling in growth momentum.