NZ Dollar Outlook: Kiwi may hold above 70 US cents ahead of Xmas on NZ data

Monday 21st December 2009

The New Zealand dollar may hold above 70 U.S. cents as it goes into the Christmas holiday amid data predicted to show the country’s economy is continuing to recover from its deepest recession in 18 years.

All six economists and strategists in a BusinessWire survey predict the currency will probably hold above 70 U.S. cents this week, with everyone saying the kiwi dollar will trade in a range, though three gave a downward bias on their forecasts.

New Zealand’s economy probably grew 0.3% and its current account deficit probably shrank to 3.9% of gross domestic product in the three months ended Sept. 30, according to Reuters surveys. The Reserve Bank expects growth to resume at a steady pace in the coming year, though Governor Alan Bollard has warned that the economy needs to rebalance itself after a strong currency hindered his desired export-led recovery.

The Dollar Index, a measure of the greenback against a basket of five currencies, climbed 0.3% to 77.80 as concerns about the state of the European banking sector prompted investors to seek relatively safe investments such as the U.S. dollar. The kiwi fell to 71.10 U.S. cents from 71.46 cents on Friday in New York.

“Investors have been squaring up their positions and have gone away and there’s not going to be much activity,” said Robin Clements, economist at UBS, who expects the currency will be little changed this week. “It would take something fairly significant to make much of a movement”

The New Zealand dollar lost ground against the greenback over the past week as investors slashed their short positions in the U.S. currency some 75% to about 45,000 contracts this month and locked in gains from higher yielding assets over the past year. A short position is where an investor sells an asset in the expectation they can buy it at a cheaper price in the future.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the kiwi dollar has tried to break through its support at 70.50 U.S. cents three or four times, and until that breaks it will stay in its current range. He expects the currency will trade between 70 cents and 72.50 cents this week.

The country climbed out of its deepest recession since 1991 in the second quarter of this year, as an inflow of new migrants and returning expatriates stoked demand in a housing market that was short on supply. Monthly net migration softened slightly last month, according to government data, as departures rose a seasonally adjusted 7.3% in November. Still, a net 20,000 more people entered the country this year, and ASB expects this to peak at about 23,000 early next year.

All of the economists surveyed agreed the kiwi will stay in its recent ranges on a trade-weighted basis this week, though the Australian and Euro crosses looked vulnerable against the New Zealand dollar.

The kiwi edged up to 64.91 on the trade-weighted index, or TWI, a measure of the currency against the euro, pound, yen, Australian and U.S. dollars, from 64.84 on Friday in New York, and rose to 49.62 euro cents from 49.49 cents. It was little changed at 79.85 Australian cents from 79.92 cents on Friday in New York, and rose to 44.05 pence from 43.87 pence.

Danica Hampton, currency strategist at Bank of New Zealand, said the Australian dollar and euro are looking “heavy” and the kiwi could push higher against the currencies, though the kiwi will probably “drift sideways” on the TWI.

“Euro weakness, rather than U.S. dollar strength” will be the main driver this week, she said, after the European Central Bank revised its estimates on European bank writedowns to 553 billion euros from 488 billion euros estimated in June.

Traders have been switching out of the euro and “putting their money into Swiss safe havens” as they exit higher yielding investments, Kelleher said. The kiwi sank to 0.7395 Swiss francs from 0.7406 francs on Friday.

The Bank of Japan altered its understanding of medium-to-long-term price stability, shifting its price range to 2% or lower from a range of between zero percent and 2%. The kiwi edged up to 64.23 yen from 64.13 yen on Friday in New York.

On the radar this week is U.S. housing data and a final estimate of third quarter GDP for the world’s largest economy, while the U.K.’s Q3 GDP is also expected to be revised up this week.

Businesswire.co.nz

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