The article written last month for the prediction of the New Zealand Dollar (NZD), after it decided to reduce its national interest rate, was, I’ll have to admit, a tad bit hasty. In a heroic simplification of predicting the market, all forecasters have the ability to basically choose a direction: up or down. But this does not necessarily capture the essence of what goes into a market forecast.
To sum up last month’s decision to proclaim a weakening NZD, it was decided that the Reserve Bank of New Zealand (RBNZ) was going to lower interest rates in order to weaken the NZD further in an attempt to boost exports, which New Zealand heavily relies on. By dropping the currency to rock-bottom, there was hope that the island economy would rebound relatively quicker. The problem is that this recent global recession has turned many economic indicators on their head. The interest rate reduction, which historically weakens a nation’s currency, in fact acted as a vote of confidence in the future strength of the New Zealand economic system, and traders saw a sharp rebound as a result.
Bearing this information in mind, there are two distinct factors to consider when trading the NZD during the month of April. First is the generation of weakness in traditional safe-havens, such as the USD and JPY. With few economic indicators damaging the New Zealand economy, the NZD may react more to the status of these currencies than to the strength or weakness of its own system. As such, the recent uptrend is likely going to continue from this news, or lack thereof. Secondly, with one of the highest global interest rates, the NZD has become the new target of many carry trades for large investors.
Both of these considerations together point to a continuation of strength for the island economy, and ForexYard traders can benefit from this continued uptrend. The only disclaimer being, as always, that this prediction flies this path only in the absence of negative economic indicators. If investors begin to see that New Zealand is far from recovering, there will be a sudden flight from the NZD and renewed weakness across its pairs and crosses.
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