After last week's volatility the New Zealand dollar is expected to be relatively stable early in the week as it awaits the Reserve Bank's Monetary Policy Statement on Thursday.
Typically after such a sharp fall the high and low of the week of the decline are perceived as the key short term levels that need to be broken to indicate the direction in the medium term.
Therefore last week's low of 0.5640 is key support and a break of this level would indicate the potential for the NZD/USD to decline towards the April 2003 low of 0.5320. Conversely a break back above 0.5850 would point to the potential for a move back towards the July 2003 high of 0.6016.
Given that New Zealand economic data remains robust and our yields remain attractive, as they have all year, the key to determining the next significant move will be whether the EUR/USD heads towards 1.1400 or weakens towards 1.0500.
Watching the dollar and the US
The New Zealand economy continues to show every sign of strength when it shouldn't. The clearest indication of that was last week's external trade figures for July. The 14% rise in the (trade weighted) exchange rate over the past year makes imports cheaper, so it is reasonable to assume that even with an increase in demand for imports, i.e. increased volume , the total value of imports would still be down a fair way.
The 1.6% decline between July last year and July this year is therefore remarkably small. Usually a large trade deficit is a sign to the Reserve Bank that the economy needs further stimulus, as exporters are having a tough time, but the extent of the domestic sector's performance over the past year is enough to quell any thoughts that the economy needs help from lower interest rates right now.
The string of opinion surveys released last week were all roughly in line, seeing the economy as pretty strong now and in no immediate need of assistance from the Reserve Bank. Of course a lower currency or a better world economy would be appreciated. The surveys showed that businesses, and farmers in particular, are still pessimistic about the future for the economy, but that negativity is diminishing and it does not extend to their own businesses. In the main, last week was all about the currency, as the New Zealand dollar struggled to maintain support. The drop in the exchange rate took the monetary conditions index down to about level with the point where the Reserve Bank started the easing cycle, and as the TWI dropped below 63.00, so went the chances of a rate cut to the OCR any time soon. An overall weaker currency would be a weak relief to exporters, and with no fears from inflation, it would be welcomed by the Reserve Bank also.