NZ Dollar Outlook: Kiwi to stay range-bound as US earnings underpin risk appetite

Monday 20th July 2009

The New Zealand dollar may trade within a range this week as better-than-expected U.S. corporate earnings stoke optimism the worst of the global recession has passed, and continue to underpin investors’ demand for higher-yielding, or riskier, assets.

Four of seven economists and strategists surveyed by BusinessWire predict the kiwi will remain bound in familiar territory this week as the market is reasonably bullish for the last quarter of companies on the Standard & Poor’s 500 index that announce earnings for the three months ended June 30. The other three economists expect the currency may test the upside this week and could push higher.

Stronger-than-expected earnings in the financial sector underpinned the biggest weekly gain on Wall Street in four months as the Dow Jones Industrial Average jumped 7.3%. Investor optimism was given another boost today when embattled lender CIT Group was reported to have secured US$3 billion from key bondholders, which the company hopes will stave off bankruptcy, according to the Wall Street Journal.

The kiwi’s “going to be following the U.S. dollar and will be driven by movements on that currency this week,” said Darren Gibbs, chief economist at Deutsche Bank. “We’ve got a lot of corporate earnings – 143 companies on the S&P, 12 of which are big Dow companies,” and the New Zealand currency will probably follow equity markets, he said.

The New Zealand dollar gained to 64.50 U.S. cents from 64.43 cents on Friday in New York as the Chicago Board Options Exchange’s Volatility Index, sometimes referred to as the “fear index”, retreated 1.2% to a pre-Lehman Brothers collapse reading of 24.34.

The kiwi was little changed at 45.73 euro cents from 45.67 cents on Friday in New York.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, expects the kiwi will trade between 62.50 U.S. cents and 65.50 cents this week with the U.S. bank results propping up sentiment for higher yields.

“The kiwi’s not reflecting fundamentals and investors still get a reasonable yield,” he said. The yield on New Zealand two-year government bonds gained 3 basis points to 3.81%, while Japanese securities of the same length were unchanged at 0.26%.

U.S. Federal Reserve Chairman Ben Bernanke will testify before the House on Tuesday and Wednesday, and the markets will be looking to see if he raises the issue of an exit strategy from the “massive stimulus measures” put in place by the world’s largest economy, according to Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney.

Trinh predicts the currency will test the top of the range this week and may trade between 63.90 U.S. cents and 66 cents as U.S. corporate earnings give investors “the glass half-full” mindset.

The kiwi will be one of the beneficiaries of the launch of the equivalent of NZ$50 billion of Toshin funds, a type of investment trust where Japanese retail investors can invest in foreign holdings, Trinh said.

“The cross could easily break 62 yen through the week on good demand for the Toshin and uridashis,” she said.

The kiwi rose to 60.96 yen from 60.42 yen on Friday in New York.

New Zealand migration data out tomorrow may support the New Zealand dollar, according to Imre Speizer, currency strategist at Westpac Banking Corp, as the net inflow of permanent residents stokes demand for housing.

Speizer predicts the currency will test the resistance levels around 66 U.S. cents this week, but remains negative on the kiwi over the next three months.

The New Zealand dollar will probably remain range-bound on a trade-weighted basis according to six of seven economists and strategists in a BusinessWire survey. One predicted it would gain.

The New Zealand dollar rose to 60.81 on the trade-weighted index, which measures the currency versus the greenback, yen, Australian dollar, pound and euro, from 60.62 on Friday in New York.

On the data radar this week domestically is credit card billings for June tomorrow. The Reserve Bank of Australia releases its minutes on Tuesday, with Australian inflation data out the following day. Also of interest will be Finance Minister Bill English’s speech on the economy on Thursday.

Businesswire.co.nz

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