Weekly Forex & Interest Rate Outlook

Weak NZ inflation and housing data plus broad US dollar strength should hurt NZD/USD this week. NZ’s Q4 CPI release may alarm some with its low headline quarterly rate, although familiar observers will note Q4 is seasonally weak. Similarly, a fall in the pace of house sales may cause a rethink regarding the expected date of the first RBNZ rate hike. We expect housing weakness to be temporary and not dissuade the RBNZ from proceeding. Still, NZD markets may take a negative view of the above and sell NZD/USD, particularly against a backdrop of US dollar strength. The 0.8400 area last week provided a formidable obstacle, unlikely to be broken in the near term. Rather it should provide the launching pad for a multi-day period of NZD selling, down to 0.8165 and possibly 0.8110. Looking further ahead, though, by mid-2014 NZ’s strong fundamentals should be even more evident, increasing interest rate differentials taking NZD/USD towards 0.8600. The main risk to this outlook is that US fundamentals exceed our expectations, causing the US dollar to outperform instead.