Weekly Forex and Interest Rate Outlook

NZ fundamentals continue to shine, witness the surge in the momentum of NZ economic data during the past few months (Chart 2). NZ interest rates have followed suit, as the chart shows, but NZD/USD has not followed NZ interest rates. The failure of NZD/USD to follow NZ-US interest rate spreads is unusual, and points to a market focus on the US dollar as one explanation. The preoccupation with the timing of Fed tapering has resulted in the US dollar outperforming all currencies (apart from GBP) since late October. This sentiment should keep NZD/USD capped by 0.8200 during the week ahead, with the main risk being a break below 0.8085. By early 2014, though, strong NZ fundamentals and RBNZ tightening should dominate, taking NZD/USD towards 0.8600.