NZD/USD Weekly Fundamental Analysis, November 9 – November 13, 2015 Forecast

Weekly Analysis and Recommendations:  The NZD/USD tumbled last week, primarily driven by the stronger-than-expected U.S. Non-Farm Payrolls report which increased the odds of a December Fed rate hike from 50% to 70%. The Forex pair closed at .6522, down 0.0250, or 3.69%. 

Prior to the release of the U.S. jobs data, the New Zealand Dollar was under pressure after a disappointing third-quarter jobs report drove RBNZ rate cut speculation. Employment unexpectedly fell 0.4 percent in the three months through September, marking the worst reading in three years. Wages growth also slowed, undermining medium-trend inflation trends. The unemployment rate stayed at 6.0%. 

The U.S. Non-Farm Payrolls report for October showed the addition of 271,000 jobs, soundly beating estimates of about 179,000. The unemployment rate ticked lower to 5 percent, marking full-employment. Average hourly earnings increased 9 cents or 0.4%, for an annualized increase of 2.5 percent. This put it slightly above the Fed’s mandated inflation target of 2.0 percent.

The interest rate differential was the primary driver of the weakness by the NZD/USD last week as well as a divergence between the monetary policies of the Reserve Bank and the Fed. Front-end New Zealand bond yields fell after the release of the jobs data, hinting at expanded stimulus expansion bets. U.S. Treasury bond yields rose, however, as investors increased bets for an earlier than expected Fed rate hike. This created a favorable interest rate spread, driving investors into the U.S. Dollar.

The odds for a December rate hike by the Fed jumped from 50% to 70% after the U.S. jobs report. New Zealand Dollar traders, however, now believe in a 50 percent probability of a 25 bps rate cut at the next RBNZ policy meeting.

Economic data from New Zealand will be limited this week with the release of the RBNZ Financial Stability Report and a speech shortly afterwards by Governor Wheeler. Traders will be looking for guidance as to the timing of the next rate cut.

With the jobs report out of the way, the focus will shift towards the consumer. Friday’s retail sales report will be most important. Core retail sales are expected to recover from the previous reports -0.3%. Traders expect it to rise 0.4%. Retail Sales are estimated to show a 0.3% gain versus the previously reported 0.1%. 

Softer-than-expected retail sales figures will not necessarily take a December rate cut off the board, but it could give short-sellers a chance to lighten up positions, perhaps triggering a modest short-covering rally by the Kiwi. 

Other important U.S. reports this week include JOLTS Job Openings on Thursday and Consumer Sentiment of Friday. 

Several Fed members are scheduled to speak next week, including William Dudley, James Bullard and Jeffrey Lacker, but the primary emphasis will be on Fed Chair Janet Yellen who is scheduled to give welcoming remarks at a Fed conference on Thursday. 

Forecast 

Traders should pay attention to the interest rate differential between the New Zealand Bonds and the U.S. Treasury Bonds. If it continues to widen then it will indicate that investors are increasing their bets for a RBNZ rate cut and/or a Fed rate hike.

The Forex pair begins the week inside a technical retracement zone formed by the rally from late August to mid-October. Despite the downside momentum on the close on Friday, there could be a technical bounce if the lower end of the zone at .6470 is not taken out with conviction. However, once it fails, there could be an acceleration to the downside especially if RBNZ Governor Wheeler is dovish and the U.S. Retail Sales report soundly beats the estimate. 

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports.

Major Economic Events for the Week: 

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