Dollar outlook: Kiwi may fall as weaker equities prompt fears for recovery

Monday 5th October 2009

The New Zealand dollar may fall this week as fears the global recovery may be slower than expected sap demand for higher-yielding, or riskier, assets amid weaker stock markets in the US and Europe.

Five of seven economists and strategists in a BusinessWire survey predict the kiwi dollar will fall this week as equity markets in the US ease from their 12-month highs ahead of the earnings season for the three months to September 30.

One expects the currency will stay in its current range, while the remaining analyst forecasts it to gain with local data likely to show New Zealand’s economy has come through the downturn relatively unscathed.

Weaker-than-expected unemployment data in the US on Friday, showing America shed 258,000 jobs in September, eroded optimism the world economy is on the upswing of a V-shaped recovery. The jobless rate rose to a 26-year high 9.8%, raising the prospect that the Federal Reserve will keep its near-zero interest rate target longer than anticipated.

The Standard & Poor’s 500 index fell 0.5% on Friday in New York as investors eschewed higher yields in equity markets. The kiwi rose to 71.58 US cents from 71.42 cents on Friday in New York.

The New Zealand dollar “will have a bit of a pull back from its recent highs” as share markets come off this week, said Derek Rankin, director of Rankin Treasury Advisory. “Everything is softening, though it’s still within an uptrend.”

Rankin predicts the kiwi will fall to the low 71 US cents-range this week before heading higher as US third-quarter earnings season approaches in the middle of October.

The Reserve Bank of Australia reviews its benchmark interest rate tomorrow, and while it’s expected to keep rates at a 50-year low 3%, traders will be looking for a commitment the bank will start to tighten monetary policy in November. The kiwi dollar was little changed at 82.50 Australian cents from 82.43 cents on Friday in New York.

“The RBA is by far the most important event this week – particularly if there are comments for a November rate hike,” said Imre Speizer, markets strategist at Westpac Banking Corp. “That would cause people to look at the interest rates and examine the Reserve Bank of New Zealand’s commitment to low rates.

Speizer predicts the kiwi will ease to between 70 US cents and 71.50 cents this week.

Locally, the major economic release this week is the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion, which is closely tracked by the central bank. Economists predict it will continue to show optimism among firms about the prospects of the economy, and this will underpin support for the kiwi.

The QSBO “is still going to be an improvement on the National Bank survey” last week, which showed businesses were the most optimistic they had been in 10 years, said Robin Clements, economist at UBS NZ. “There’s a positive bias for the currency this week.”

Clements was the only analyst predicting the kiwi will gain this week.

Dairy prices probably won’t soar for a third month when Fonterra Cooperative Group’s online auction takes place on Tuesday in the U.S. Milk prices on the globalDairyTrade website have climbed more than 50% in the past two months, and Clements can’t see them gaining further. If prices consolidate, that should be supportive of the New Zealand dollar.

The ANZ National Bank Commodity Price Index out today will be closely watched to see if commodity prices have extended their gains.

Still, weakness against the greenback may not translate to a lower trade-weighted index, a measure of the kiwi against the US and Australian dollars, euro, pound and yen, with four of seven strategists surveyed predicting the TWI will remain in a range this week. The other three analysts expect the TWI to follow the US currency down.

The kiwi was little changed at 65.32 on the TWI from 65.22 on Friday in New York.

“The TWI has been going up for most of this year,” Rankin said. “It’s hard to see what’s going to shock that at the minute.”

The Bank of England and European Central Bank will review their benchmark interest rates on Thursday, and while they aren’t expected to hike rates, the markets will be watching for more commentary around sentiment in the Euro-zone. The kiwi was little changed at 48.99 euro cents from 49.05 cents on Friday in New York.

Finance ministers of the seven largest economies met in Istanbul over the weekend and reiterated the need for stable currency markets, saying “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

Japanese Finance Minister Hirohisa Fujii told reporters his government will intervene in currency markets if the yen “moves in a biased direction.” The kiwi rose to 64.10 yen from 63.79 yen on Friday in New York.

Data out on Thursday is expected to show Australia’s unemployment rate rose to 6% last month, while Friday will see Statistics New Zealand release September’s electronic card transactions.

Businesswire.co.nz

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