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NZDUSD outlook

Written by Ian Dobbs on April 7th, 2017.      0 comments

9:30am(NZT)

For those looking to sell USD and buy NZD the recent price action will pleasing to see. The pair has been in a very gradual downtrend for the past two and a half weeks or so. At this stage there is nothing to indicate the recent downtrend is over, but we do have a key economic release tonight.

US employment data gets released just after midnight and that will dictate the trend as we head into next week. It's extremely hard to predict where some data will print, but if I had to make a call I suspect the risks are that it could come in stronger than the market is forecasting. That would boost the USD and help drive the NZD lower.  I think the risk is skewed that way because a couple of second tier employment indicators this week have come in much stronger than expected, but it seems the market hasn't yet revised up its forecast for tonight's release, which is a bit of a surprise.

If we do indeed get a good US employment number then a move down into the 0.68's is very likely over the course of next week. I am mindful however that at some stage the NZD will run into decent support. Our local economy is performing very well relative to the rest of the world and that means the NZD is not going to fall out of bed at all. In fact, any significant downside action in the NZDUSD has to come from USD strength, because you can't make any viable case for NZD weakness at this stage.

That's really the outlook for the near term. If we look longer term, say into the second half of the year, there is potential for a significant shift in Fed policy that could have a major impact on markets in general.

In the years after 2008 the Fed did massive amounts of quantitative easing. Basically printing money and using that to buy bonds. They even bought mortgage backed securities with it! This had the double impact of pumping cash into the financial system as well as driving down long term interest rates. The Fed now has an absolutely massive balance sheet and at some point they need to start to unwind that. To date their policy has been that any bond maturities get reinvested straight back, which has maintained the level of their balance sheet. But they are now openly talking about not reinvesting maturities and just letting the balance sheet normalise as maturities roll off. This would be a seismic shift in policy and would see long term interest rates move significantly higher. It would also support the USD to a large degree. If that announcement comes in the second half of the year the USD could easily embark on a major appreciation trend that would drive the NZDUSD down sub 0.6500.

As always however, any longer term forecast is fraught with danger as there are so many unknown variables that could impact. And we can't rule of the Trump factor! He's as unpredictable as anyone. His big impact on the level of the USD will be as a result of his tax policy. If he can get everything he wants in terms of tax passed into law it will be very stimulatory for the US economy and that will also support the USD. But, we've just seen him fail badly with healthcare so it's very hard to know how successful he will be on tax. A big failure to get significant tax reform would see the USD weaken. Again, it's likely to be the second half of the year before we know what's going to happen there.

 
 

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