NZD/USD Monthly Fundamental Forecast March 2012

Outlook and Recommendation

The incredible run by the New Zealand dollar(NZD) so far in 2012 is bound to lose momentum in the coming months as the Reserve Bank of New Zealand(RBNZ) further supports the country's economic recovery. While the RBNZ decided to leave the official cash rate unchanged at 2.5% after the latest monetary policy meeting, inflationary trends are now placed at the bottom of the 1-3%comfort zone, implying that further economic support is likely to be in the cards. Headline inflation came down significantly to 1.8% y/y in the fourth quarter of 2011, with both tradable goods and non-tradable items displaying fading pressures. Costs in externally exposed sectors have been underpinned by NZD strength, while excess capacity conditions seem to prevail in locally oriented industries. Limited signs of reinvigorating household spending have paired with reconstruction efforts in the Canterbury region adversely affected by last year's Christchurch earthquake. The fall in New Zealand's unemployment rate to 6.3% at the last reading was underpinned by a narrower participation rate, and therefore points towards remaining economic slack.

The US currency environment is dominated by the US economic outlook, flows and the broader movement of the US dollar. For the USD, the improving economic outlook and dollar positive flows stemming from the European crisis have been offset by historically loose US monetary policy that includes quantitative easing and rising oil prices. There are limits to how long the US economy can withstand a strong currency. Accordingly, we expect the USD to trend lower this year against most currencies

The New Zealand dollar (NZD) has seen movement in February mimicking that of its major currency commodity peer AUD. While the trend in NZD/USD remains bullish, the pace of gains has slowed. Investors favor NZD and are net long US$2.0 billion, however the recent rally has not allowed for a full retracement to mid-2011 highs near 0.8800.We are bullish NZD with a Q4 2012 target of 0.83.

Central Bank

The Reserve Bank of New Zealand held rates steady in January, noting that "the global economy remains fragile and risks to the outlook remain." The Bank will keep a watchful eye on the global outlook and likely stay on the sidelines until conditions stabilize. The rebuilding following multiple earthquakes will lift growth; but, with inflation "well contained" and downside economic risks persisting, the RBNZ is comfortable NEW ZEALAND standing firm.

Official Rate: 2.50% • Quantitative Easing: No • Last Decision: January 26, unch • Next Decision: March 8, Hold

Historic Chart

March Major Economic Events

NZD/USD Pivot Points (Time Frame: 1 Day)