Dollar outlook: Kiwi to fall as greenback returns to favour

Tuesday 27th October 2009

The New Zealand dollar may fall this week as speculation the Federal Reserve will tighten monetary policy earlier than expected stokes the appeal of the greenback and appetite for higher-yielding, or riskier, assets dims.

All seven strategists and economists in a BusinessWire survey predict the kiwi will fall this week as investor appetite for riskier, or higher-yielding, assets wanes and markets await the Reserve Bank of New Zealand’s review of interest rates on Thursday.

The Dollar Index, a measure of the greenback against six major currencies, climbed 1% to 76.06 as markets become convinced the Fed will change its wording in next month’s statement to pave the way for the removal of its quantitative easing programme, according to the Wall Street Journal.

Equity markets and commodity prices tumbled in the US amid concern banks and lenders may have to raise more capital to exit government support programmes.

“The kiwi’s suffering at the hands of heightened risk aversion and a clear reversal in US equities,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. She predicts the currency will trade between 73.80 US cents and 76 cents this week. The kiwi fell to 74.74 cents from 75.42 cents yesterday in New York.

Central bank Governor Alan Bollard’s review of the official cash rate on Thursday is a barometer of when he will move to hike rates. Bollard has been loath to cede any ground towards an earlier tightening of monetary policy, and traders will be watching to see if he will back down on his statement that rates will remain “at or below” current levels until late next year.

Trinh said Bollard’s stance has never been credible, but with investors returning to support the greenback, any softer rhetoric won’t be played out against the U.S. dollar. “If the RBNZ’s intentions are more hawkish, the markets will reflect a stronger kiwi on the crosses,” she said.

Prime Minister John Key told a Dow Jones reporter at the ASEAN summit in Thailand over the weekend that New Zealand was unlikely to see any increases to interest rates until the middle of next year at the earliest, with the strong kiwi dollar making it difficult for Bollard to boost the OCR.

“As long as the exchange rate stays high, it’s not likely, I would have thought, that the Reserve Bank alters interest rates,” he said.

The other major event for the kiwi this week will be tomorrow’s release of Australian inflation data. The lucky country’s consumer price index probably rose 0.8% in the three months ended September, according to a Reuters survey.

Imre Speizer, markets strategist at Westpac Banking Corp., said the CPI data will be a “big event” for the kiwi dollar, after the Reserve Bank of Australia indicated it will return its focus to inflation after it became the first G-20 nation to begin hiking interest rates earlier this month. “The CPI data will indicate whether the RBA will hike rates by 50 points or 25 points when next week,” Speizer said.

If the inflation number prints higher than expected, it will probably see the kiwi fall against the Australian dollar, he said. The currency was little change at 81.50 Australian cents from 81.55 cents yesterday in New York.

There are more signs emerging of a reversal in the uptrend of the kiwi, but it’s still too early to turn bearish, Speizer said. He is neutral with a negative bias on the currency, though if it breaks below 74.50 US cents that will become “just bearish”.

The National Business Outlook, a survey of firms’ confidence with a strong correlation to the NZ Institute of Economic Research’s quarterly survey of business opinion, is expected to show New Zealand’s economy is continuing to improve when it’s released on Wednesday.

Speizer said while it won’t have any bearing on this week’s rate review, the central bank will have to take any improvement into account in its next meeting.

The greenback will probably gain when US gross domestic product for the third quarter is released at the end of the week. The market predicts the data will show annualised growth of 3.2%.

All seven economists predict the kiwi will probably be weaker on a trade-weighted basis as investors eschew higher yields in favour of the relative safety of the greenback.

The kiwi dropped to 67.06 on the trade-weighted index, or TWI, a measure of the currency against the Australian dollar, greenback, yen, euro and pound, from 67.51 yesterday in New York.

Mike Jones, strategist at Bank of New Zealand, expects the kiwi to come under pressure against the pound after pushing over 46 pence after UK GDP was much worse than expected.

“The kiwi didn’t manage to hold its gains for long” and BNZ predicts it will come down against the pound this week, he said. The kiwi fell to 45.65 pence from 46.29 pence yesterday in New York, and was little changed at 50.10 euro cents from 50.16 cents.

Still, the kiwi may find some favour among investors out of Japan this week, when a couple of Toshin funds are launched, according to Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “It all depends on demand and the uptake on subscriptions,” he said.

The kiwi fell to 68.75 yen from 69.21 yen yesterday in New York. On the data radar this week is the merchandise trade figures for September on Thursday and building permits on Friday.

Businesswire.co.nz

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