The New Zealand Dollar/USD Rebound in the recent financial turmoil is a little disconcerting. In this time of economic uncertainty, it is not hard to understand why investors have been reluctant to make the big moves that are needed to ensure better long term income and profits. The reality is that the Federal Reserve is still very weak as a policymaker, and it’s not clear what the central bank will do in response to the global slowdown and crisis in Europe.
As a result, we expect the New Zealand Dollar/USD Rebound to slow down and come to a stop as Foreshadow Change in Guidance in the United States suggests. And for those who have made the mistake of investing in currency with the hopes that it would soar in value in the coming months, you need to reconsider.
The fact that the New Zealand Dollar is now losing strength against the US dollar highlights the weakness of the New Zealand economy and the uncertainty associated with the global financial crisis. The US dollar is strong, but it cannot support any further growth in either employment or income. This is not good news for the Canadian economy as well as for Australia.
One of the reasons that the New Zealand Dollar/USD Reversion is taking place is because of FOMC Minutes Foreshadow Change in Guidance. At their meeting last week in Washington DC, the Federal Reserve Board took the first step in a three-part package to address the economic crisis and announced an additional $25 billion of stimulus for banks and financial institutions. The package consists of two measures:
The second part of the package, the provision of funds to banks by the Federal Reserve, will be announced at the FOMC Minutes Foreshadow Change in Guidance Release on Thursday morning. The third measure is known as the Term Asset Purchase Program and will provide funds to financial institutions to purchase unsecured debt securities, such as commercial mortgage-backed securities (CMBS), which is considered to be an attractive asset to finance at the moment.
If these announcements are confirmed, and the third measure is implemented as scheduled, it will likely cause the New Zealand Dollar/USD Reversion to decline. It will be similar to the reaction of the Australian Dollar against the US Dollar after FOMC Minutes Foreshadow Change in Guidance announced an increase in the Federal Reserve’s monthly bond purchases, which resulted in the AUD/USD dropping to its lowest ever recorded level against the USD.
With this potential downside, it is understandable why some people have been reluctant to make the big moves necessary to secure a healthy investment return for themselves and their families. Although the NZD/USD Reversion is not a death sentence, many investors are likely to be waiting a few more weeks until the US Federal Reserve starts to act, and the New Zealand Dollar recovers and the risks associated with short term trading become more bearish.
For those who have been making the mistake of investing in the US Dollar in anticipation of a bounce back in the market, the FOMC Minutes Foreshadow Change in Guidance could be a wake up call. The Federal Reserve may continue to tighten monetary policy and maintain its policies in order to support the financial system through tighter credit conditions and a higher interest rate environment.
If this is the case, and with the Federal Reserve expected to continue on track with its current plan, the NZD/USD Reversion could become even stronger as strong employment figures in the US are confirmed, and the global economy is expected to regain its previous growth momentum. It could turn out that the last part of the US Dollar Reversion was nothing more than a false economy, in which we have seen no sign of a tightening financial cycle in the near future.
If this is the case, the FOMC will be forced to take further action in an attempt to prevent the NZD/USD Reversion from turning into a Foreshadow Change, which would further affect the New Zealand Dollar/USD Reversion. against the US Dollar.
As the FOMC considers its next move, it is likely that the central bank will move away from its previously stated stance on reducing the Federal Reserve’s balance sheet, which is currently around $75 billion. If it does not, we may see more tightening of credit and the possibility of lower interest rates, which in turn could push down the NZD/USD Reversion against the US Dollar, causing further declines.