The negative sentiment towards emerging markets should weigh on the NZD this week.That is despite NZ economic data pointing to an acceleration in growth (Chart 2), which means Thursday’s RBNZ decision will be a close call. If it hikes the OCR, NZD/USD could rally a cent on the surprise. However, we expect the RBNZ to wait until March, when there’s a better forum to explain the decision.If we are correct, then the cloud hanging over many emerging markets (Chart 3), plus further reduction in Fed stimulus on Thursday, should dominate and weigh on NZD/USD.If 0.8175 breaks, then 0.8085 would be at risk.Looking further ahead, though, by mid-2014 NZ’s strong fundamentals and increasing interest rate differentials should push NZD/USD towards 0.8550. The main risk to this outlook is that US fundamentals exceed our expectations, causing the US dollar to outperform instead.
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