Dollar outlook: Kiwi may gain as investors exit greenback

Tuesday 2nd June 2009

The New Zealand dollar may gain this week as investors continue to exit their holdings in the greenback as risk appetite returns and concerns linger over America’s ability to fund record budget deficits.

Six strategists and economists in a BusinessWire survey predict the kiwi dollar may extend its gains from a seven-month high this week as growing optimism about the state of the global economy encourages uptake for high-yielding, or riskier, assets. Some anticipate attempts by Finance Minister Bill English or Prime Minister John Key to jawbone the currency lower to prevent it hampering recovery from recession.

Fears of a budget blow-out in the US and how the Obama administration will fund fiscal spending contributed to a 6.8% decline in the Dollar Index, which measures the US dollar’s performance against the euro, yen, pound, Canadian dollar, Swiss franc, and Swedish krona, last month. An improvement in global sentiment encouraged investors to unwind their holdings in the world’s reserve currency after the credit crunch last year saw traders flock to safety as international liquidity dried up.

“The rallies in the kiwi have gained so far so quickly,” said Darren Gibbs, chief economist at Deutsche Bank. “People are seeing the kiwi economy as likely to do better than most, particularly in a world where people are getting more upbeat.”

Gibbs predicts the New Zealand dollar may trade between 64 US cents and 65.70 cents this week after reaching a seven-month high of 65.65 cents. The kiwi slipped to 64.79 cents from 65.03 cents yesterday. The New Zealand dollar has clawed back half of its losses since it sank to as low as 49 US cents in March from as high as 82 cents in the same month the previous year.

Imre Spezier, currency strategist at Westpac Banking Corp., said this kind of retracement isn’t uncommon when a currency tumbles as quickly as the kiwi has, and he predicts the currency will “push a little higher” as the improvement in global sentiment encourages investors to pull out of their US denominated holdings.

Support for the US dollar may be further dimmed next week when the US government holds auctions for 10- and 30-year Treasuries. The sale of securities will provide a gauge of how willing investors are to fund the Obama administration’s projected deficit of US$1.75 trillion.

“Upward pressure is not good for the New Zealand economy at this level – any tenuous recovery will be kyboshed with the kiwi this high,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

The currency’s gains may spur “jawboning from English or Key” to try and pull the currency back, he said. Reserve Bank Governor Alan Bollard tried to jawbone down long-term interest rates in April when he said they were “out of line” with the bank’s expectations.

The kiwi sank about 1 US cent after the statement. The RBNZ is due to consider monetary policy at a meeting next week and is expected to keep the official cash rate unchanged at a record low 2.5%.

RBC Capital Markets senior currency strategist Sue Trinh said New Zealand’s central bank will probably wait until the currency reaches 70 US cents before intervening or seeking to drive it lower. With a large number of uridashi bonds maturing over the next three months, Bollard will be wary of discouraging investment in the nation’s economy by driving down the value of the kiwi, she said.

Rabobank Nederland NV will sell a $419 million uridashi bond today, the largest such sale this year, at a coupon of 3.2%. Around $15 billion of New Zealand dollar uridashi and eurokiwi bonds are set to mature this year. The kiwi rose to 62.43 yen from 61.48 yen yesterday.

The Australian central bank reviews monetary policy today and is expected to keep its benchmark rate at 3%. The Reserve Bank of Australia paused last month after it found evidence of a pick-up in the global economy. Australia’s economy may have shrunk 0.2% in the first quarter, according to a Reuters survey, showing New Zealand’s largest trading partner has fallen into recession when data is released tomorrow.

The kiwi rose to a six month high 80.52 Australian cents, and recently traded at 79.95 cents from 80 cents yesterday.

The Bank of England and European Central Bank review monetary policy on Thursday, and investors will be looking to see if the ECB will begin quantitative easing as it seeks to lift the Euro-zone out of recession. The New Zealand dollar increased to 45.71 euro cents from 45.64 cents yesterday.

On the radar this week is Fonterra Cooperative Group’s latest online auction for milk powder, tomorrow New Zealand time. The world’s largest exporter of dairy products cut its forecast payout for the upcoming season to $4.55 per kilogram of milk solids, and the last online auction recorded a 4.1% decline in prices.

The US government will also release employment data at the end of the week, and any sign of a pick-up in the labour could see risk appetites continue to improve.

Businesswire.co.nz

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