26 October 2016
Currency traders will keep a close eye on the New Zealand central bank's interest rate decision on Thursday. Photo: Bloomberg
Currency traders will keep a close eye on the New Zealand central bank's interest rate decision on Thursday. Photo: Bloomberg

New Zealand dollar faces downside risk

Gold price rally appears to have run out of steam after a sharp uptick on June 3.

But the yellow metal is still up 2.4 percent this month as a dismal US jobs report has bolstered expectations that the Federal Reserve will put off a rate hike for the time being, dampening the prospects for the US dollar.

Gold touched a two-week high of US$1,248.4 per ounce on Monday after some Fed officials hinted that there won’t be any move on policy rates next week.

That came as ETF SPDR Gold Trust, the world’s largest gold exchange-traded fund, has seen its holdings of the precious metal fall by 0.03 percent to 881.15 metric tons.

Gold hit a low of US$1,208 on March 28. If the price slips below that level again, it could face further downside.

However, the metal has some short-term support at the 100-day moving average of US$1,225 per ounce.

The US dollar index has been hovering near a four-week low. On Monday, the benchmark tumbled to 93.75, the lowest since May 11.

But the greenback rose to 107.8 against the Japanese yen on Tuesday, bouncing from a one-month low of 106.35. The US unit still faces resistance at 110 in the near term.

The market will keep a close watch on a rate decision by the Reserve Bank of New Zealand on Thursday.

It’s expected that the rate will be kept at a record low of 2.25 percent. However, it is also possible that the central bank might cut the policy rate in light of low inflation and a strong New Zealand dollar.

Policymakers have to find the right balance amid a strong currency and red-hot property market.

Housing prices in New Zealand have outpaced those all in countries in the world except for Qatar, according to data from the International Monetary Fund.

Meanwhile, a strong currency is exerting some pressure on the central bank to cut interest rates. Currently, the New Zealand dollar is 2.1 percent stronger than the targeted exchange rate of the central bank.

The trade-weighted rate of the New Zealand dollar is around 72.4, and the central bank is striving to keep inflation rate at 1 to 3 percent.

Also, there is sign that the New Zealand dollar has entered the over-bought territory against the US dollar, and that it might face some correction in the short term.

Elsewhere, the pound sterling has started to ease again amid growing market concerns about a potential “Brexit”.

The British unit dropped below 1.44 on Monday, off from the peak of 1.4738 on May 26, against the US dollar. Technical analysis suggests that it could weaken further to 1.389.

The US dollar may face some resistance at 250-day moving average of 0.979 against the Swiss franc. The greenback is likely to gain further strength to 1.01, according to technical charts.

Among other currencies, the Aussie dollar soared to a one-month high of 0.745 against the US dollar on Tuesday. Interbank rate futures show the odds for a rate cut in July have dropped from 25 percent to 14 percent.

Nevertheless, the market believes that the Reserve Bank of Australia is very likely to take action before the year-end.

Currently, the Aussie dollar is moving near the 100-day moving average of 0.736. It might stage further gains if it manages to stay above this level.

This article appeared in the Hong Kong Economic Journal on June 8.

Translation by Julie Zhu

[Chinese version 中文版]

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Sales director, Emperor Capital Group Limited; HKEJ columnist

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