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NZD thoughts for the next few weeks

Written by Sam Coxhead on January 27th, 2011.      0 comments

4:02 PM (NZT) The NZD/USD is at interesting levels around the .7700-.77500 level. Taking a one month view is all about weighing up the probabilities.
I would say that there is a reasonable chance that we could have a peak up towards the .7800/.7850 level , but imagine that the stay up there would be reasonably short lived should that eventuate. I think that it feels comfortable at the moment anywhere between .7550 and .7800, so in terms of buying USD at current levels then you would have to be reasonably comfortable with that.
A lot of the near term performance will be based on two factors that I can see.
Firstly, the performance of the resurgent EURO on the calming of fears about the Govt debt issues that the peripheral member states face. In the last 10 days or so there has been a distinct turn around in sentiment for the EURO, along with Japanese, Chinese and Russian central bank interest to buy the EURO, we are starting to hear a lot more flows from Funds moving back into EURO after being absent for a few months at least. They are being drawn to the EURO because of the perceived risk in holding European Govt debt diminishing. Personally , I think that while this current sentiment change may follow through in the short term, we will see another round of “the EURO is damned” attitude hit the market. The NZD trades with a reasonable correlation to the EURO, and that is why this factor is important. The EUR/USD is currently near fairly pivotal levels of 1.3730-40, should a sustained break of .13730-40 occur a push up towards 1.40 may occur fairly rapidly and this is when we would see the NZD head up to .7800-.7850 to the USD.
Secondly, the Chinese factor should not be discounted. They currently have a significant inflation problem which they are struggling to address. They have hiked interest rates, put in place lending controls on the banks to curb lending growth, and therefore demand for resources in the market, but at this stage their efforts have not been rewarded. Should they continue to plug away and actually make some ground to curb their domestic growth rate, then the AUD and NZD would be negatively impacted, as these two currencies have a reasonably high correlation to growth.