By David Song, Currency Analyst

Fundamental Forecast for New Zealand Dollar: Bearish

The New Zealand dollar advanced to a fresh monthly high of 0.8051 and the NZD/USD may continue to retrace the sharp decline from the previous month as market participants increase their appetite for yields. As the economic docket remains fairly light for the following week, risk trends are likely to heavily influence the kiwi, and the rise in market sentiment may gather pace in the days ahead as global policy makers increase their efforts to address the risks surrounding the world economy.

However, as the fundamental developments coming out of China casts a weakened outlook for global growth, fears of a slowing recovery may dampen demands for the high-yielding currency, and a soft 3Q GDP report from the world’s second largest economy could spark a bearish reaction in the New Zealand dollar as investor confidence falters. Beyond risk sentiment, speculation for higher borrowing cost may help to prop up the New Zealand dollar, and we may see the NZD/USD extend the rebound from 0.7471 as market participants continue to see higher interest rates in the isle-nation. According to Credit Suisse overnight index swaps, market participants see the cash rate being increased by more than 25bp over the next 12-months, and speculation for higher interest rates may carry the kiwi higher as investors weigh the outlook for monetary policy. However, we may see Governor Alan Bollard endorse wait-and-see approach for the remainder of the year given the uncertainties surrounding the fundamental outlook, and the New Zealand dollar may face headwinds over the near-term should the central bank head talk down expectations for higher interest rates.

As the NZD/USD pushes back above the 78.6% Fibonacci retracement from the 2009 low to the 2010 high around 0.8000-10, we may see the pair make a run at former support around 0.8100, but the key level may come in as new resistance, which coincides with the 50-Day moving average at 0.8119. In turn, the kiwi-dollar may consolidate in the week ahead, and the exchange rate may trend sideways ahead of the RBNZ interest rate decision scheduled for October 26 as market participants weigh the outlook for monetary policy. – DS
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Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/nzd/2011/10/14/New_Zealand_Dollar_Rally_To_Falter_Should_Global_Growth_Deteriorate.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.