The New Zealand dollar has thus far endured a poor 2016 on the back of global events but next week the currency’s resilience will be further tested by domestic events.
Heading into the weekend the commodity currency complex is suffering the effects of renewed market pessimism.
“The sentiment-linked Australian and New Zealand Dollars plunged alongside Asian stock markets while the Euro and Yen out performed amid an unwinding of carry trades positions as risk aversion struck markets overnight,” says Ilya Spivak, Currency Strategist, at DailyFX.
Chinese once again appears to be behind the selloff.
“Beijing weakened the Yuan by the most in a week at the daily fixing, a now-familiar source of market jitters, and posted weaker-than-expected lending figures,” says Spivak.
The pound to New Zealand dollar has risen to a 4 week best at around 2.24 on the back of the selling pressures.
The New Zealand to US dollar exchange rate meanwhile sunk back to 0.6398 - levels last seen in September 2015.
Watch the Domestic Calendar
It is virtually impossible to predict what will happen to the NZD based on shifting risk sentiment; risk is the known unknown in currency markets and the best that can be done is position accordingly through hedging.
However, for the NZ dollar next week promises to be an interesting one from a domestic perspective.
Tuesday morning’s (10:00am) Quarterly Survey of Business Opinion, in particular, will provide its usual scene-setting of how NZ firms are feeling about things.
“We expect it will look distinctly better than it was at previous release, three months ago, in line with the improved tone seen in the month to month economic surveys,” say analysts at BNZ in Aukland.
The question is, just how positive will the QSBO get? “It could have a bearing on our near-term view on the economy,” suggest BNZ.
Yet the markets will probably put more weight on Wednesday’s (10:45am) Q4 CPI. We are looking for a 0.2% quarterly fall in this – partly seasonal – in line with market and RBNZ expectations.
“We judge downside risk, however, given the weak December FPI. This is reflected in the annual inflation of 0.3% that we are picking for Q4, compared to (current) market polls, and RBNZ expectations, of 0.4% y/y,” say BNZ.
The real issue for the headline CPI is that it’s likely to far undershoot what the December MPS forecast for Q1 2016, given technicalities around oil (and food). Yet core inflation measures stand a good chance of holding up (something also not to overlook in Wednesday’s Q4 CPI result).
There is a Global Dairy Trade auction scheduled for the early hours of New Zealand’s Wednesday morning.
The dairy sector is incredibly important to New Zealand’s terms of trade and therefore we will be looking for an improvement here.
BNZ warn though that disappointment could be the order of the day as dairy prices look prone for another fall in price, given the worsened global commodity context since last auction, back on 6 January, and for the fact that whole-milk powder price futures on the NZX have dribbled off a fraction further.
But also bear in mind NZD has been trending down, which provides an offset.
We are forecasting January to remain challenging for the New Zealand dollar and look for the GBP to NZD conversion to track higher.