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BNZ Strategist And BNZ Models & Technicals

Fuseworks Media
Fuseworks Media
BNZ Strategist And BNZ Models & Technicals

BNZ Strategist and BNZ Models & Technicals

Economic Outlook

New Zealand's fiscal position will get worse before it gets better. And we're not just talking about the ongoing increase in public debt and the consequences of the Canterbury earthquake. The operating deficit is likely to press 5% of GDP in a core sense this fiscal year, with much of it structural rather than "simply" cyclical. And so the required path back to surpluses will likely be more painful and drawn out than the Government anticipates, especially with the Treasury too generous on the country's medium-term GDP potential, in our humble opinion. As for the near-term economic picture, next week's NBNZ business survey will be good if can hold together the way it did so well last month, while the 4 November Q3 Household Labour Force Survey should not look as bad as it seem for Q2, when its unemployment rate spiked to 6.8% (from 6.0%) and employment measure fell 0.3%.

Interest Rate Outlook and Strategy

NZ interest rate markets have remained in something of a holding pattern over the last couple of weeks, amid tight ranges and on low volumes. The RBNZ, at next Thursday's OCR review, is unlikely to upset near-term market pricing of the next hike being "around" March/April - something we don't have any issue with, timing wise. However, we're not so sure the Bank's commentary, more generally, will sit comfortably with the weak top of 4.00% the market perseveres with for the cash rate by early 2012. We still see it being 5.00% by then, as the RBNZ guards against inflation pressures and risks, amid a pick up in GDP growth that will quickly run into supply-side limitations. With all of this, a specific trade idea would be to short the 1-year OIS against the protection of being long the March 2011 futures.

Currency Outlook

For the immediate term we can't help but think the NZD/USD is starting to look overstretched. In the least, it has been all too keen to test the top end of the 0.7350-0.7550 short-term "fair value" range we have evaluated. Local economic developments have, on the face of it, provided few reasons to chase the NZD higher, meaning much has rested on the weakening USD leg of the equation. In this respect we also note the already long positioning on NZD/USD, in effect. More generally, however, we believe NZD/USD will be better supported in the months ahead by the likes of NZ interest rate upside, robust commodity prices and a decent pick-up in GDP growth through the course of calendar 2011. This should keep the unit strong for longer. Indeed, we've just upped our peak a couple of cents to 0.7700, out to June 2011.

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