Dollar outlook: Kiwi supported at US 70c

Monday 30th August 2010

The New Zealand dollar is finding support at 70 US cents after US Federal Reserve chairman Ben Bernanke stoked investors' appetite for risk on Friday by saying he would stand by the US economy and print more money if need be.

Five of eight economists and strategists are downbeat on the kiwi, though none of them expect it to break through 70 US cents this week as Bernanke's speech encouraged investors to look for higher yields.

The remaining strategists predict the currency will trade in a range this week. Offshore news will dominate the direction of the currency after Bernanke set the tone in Jackson Hole, Wyoming last Friday, with a slew of US data leading risk-sensitive currencies like the kiwi.

Non-farm payrolls and the ISM manufacturing survey will be at the top of the market's focus when they're released on Friday and Thursday respectively.

The kiwi climbed to 71.16 US cents from 70.42 cents on Friday in New York.

"This week is going to be all about the US growth story," said Mike Jones, strategist at Bank of New Zealand.

"The market is looking for signs the US has avoided recession."

Jones expects the local currency will continue its gradual decline, as evidence accumulates of a deteriorating New Zealand economy.

The National Bank Business Outlook, released this afternoon, will likely show firms are less confident about the economy and their own prospects, which will put the kiwi dollar under some pressure.

Darren Gibbs, chief economist at Deutsche Bank NZ, said the National Bank survey will probably show a weaker headline number after the latest BNZ-Business New Zealand performance of manufacturing index showed the sector shrank last month. He forecasts the currency to trade between 70 US cents and 72 cents this week, with the bottom of the range too tough to break.

The future of Timaru lender South Canterbury Finance will have a bearing on investor sentiment, and could weigh on the kiwi if the country's biggest lender without a bank affiliation goes belly-up. The firm has until tomorrow to secure a new investor with its trust deed waiver expiring at the end of the month, and chief executive Sandy Maier is trying to talk down speculation over the firm's survival.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the lender's future was hanging over the outlook for the agriculture sector.

A large number of farms borrow from SCF, and that was weighing on the kiwi dollar.

"I'm a little more bullish than bearish this week, but South Canterbury's got the potential to be negative" for the kiwi, he said.

Kelleher predicts the currency will trade between 70.25 US cents and 72.25 cents this week.

Fonterra will hold its online auction on Wednesday in the US, and will be hoping for a pick-up in prices after it kept its forecast pay-out on hold.

Last month, the price of whole milk powder sank to an 11-month low.

Australian current account and second-quarter gross domestic product data, due tomorrow and Wednesday respectively, may put the kiwi under pressure against its trans-Tasman counterpart, with Australia's economy still resilient after it dodged a recession during the global financial crisis.

The kiwi dropped to 78.88 Australian cents from 79.39 cents on Friday in New York.

Khoon Goh, head of market economics and strategy at ANZ New Zealand, said the kiwi will probably underperform against the Australian dollar this week, with second-quarter GDP forecast to show 0.9% growth, highlighting the divergence between the trans-Tasman economies.

The kiwi surged 2.2% against the yen after the Bank of Japan announced it will hold an emergency meeting to discuss the Japanese currency's recent strength.

The kiwi climbed to 60.98 yen from 59.64 yen on Friday in New York. Derek Rankin, director at Rank Treasury Advisory, said the Japanese government can intervene in the currency and have a short-term impact to help exporters' hedging policies.

Strategists surveyed by BusinessDesk are mixed on the currency's fortunes on a trade-weighted basis, with four predicting it will range-trade, and the other four giving it a negative bias.

The kiwi rose to 66.59 on the TWI from 66.03 on Friday in New York, and gained to 55.84 euro cents from 55.37 cents.

It rose to 45.79 pence from 45.39 pence last week.

On the data radar this week is July's building consents tomorrow and ANZ's commodity price index on Wednesday. The European Central Bank meets on Thursday, while the Federal Open Market Committee's minutes from its last meeting are released on Wednesday. On Friday, Chinese manufacturing data is released.

Businesswire.co.nz

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