Dollar outlook: Kiwi may gain as data stokes risk appetite

Monday 22nd June 2009

The New Zealand dollar may gain this week on speculation domestic data will indicate the economic slump is easing, adding to worldwide signs of a thaw that are boosting demand for higher-yielding, or riskier, assets.

Four of eight strategists and economists in a BusinessWire survey predict the kiwi dollar will rise this week, with government figures expected to show a milder drop in gross domestic product than the central bank has predicted. Three economists say the currency will be little changed, while one forecasts it will push lower on the data reflecting continued economic weakness.

New Zealand’s economy shrank 0.7% in the first three months of this year, according to a Reuters survey. That’s better than the 1% contraction predicted in the Reserve Bank’s monetary policy statement this month and may stoke bets the bank is done cutting rates for now.

European Union leaders over the weekend hinted at their willingness to unwind fiscal and monetary stimulus measures once the region starts to climb out of recession, and the US Federal Reserve’s next policy statement in due on Thursday.

“If the RBNZ has ended its easing for the cycle, the kiwi will continue to rise” as investors seek out higher returns, said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. “The US FOMC should be well worth watching with markets divided over the next move” and looking whether the policymakers will comment on when it will stop printing money, she said.

The Fed is expected to keep its target rate at a band of between zero and 0.25%, according to a Reuters survey, and economists predict it will maintain its quantitative easing programme.

The kiwi was little changed at 64.09 US cents from 64.04 cents in New York on Friday, and Trinh said it could retest 66 US this week. The currency has surged as much as 34% from its lows in early March. Statistics New Zealand is scheduled to release the GDP data on Friday.

Trinh said the kiwi and Australian dollars will be underpinned against the yen this week by a “sizeable Toshin fund launch” of some A$7 billion. Toshin funds pool funds from Japanese investors to buy assets in higher yielding currencies than the yen.

“Australian dollars are the denomination of choice, but there still appears to be latent demand for the kiwi as well,” she said.

The kiwi fell to 61.59 yen from 62.12 yen on Friday in New York, while the Australian dollar fell to 77.04 yen from 78.11 yen last week. The New Zealand dollar gained to 79.94 Australian cents from 79.51 cents on Friday.

Central bank Governor Alan Bollard tried to jawbone the currency lower last week when he told a business audience in Wellington the strong kiwi dollar was hindering the economy’s ability to rebalance. If markets were buying the currency “on the expectation of a strong recovery they may end up being disappointed,” he said.

Bollard reiterated the kiwi needs to be lower to improve the external imbalance in the current account deficit. An export-led recovery requires a weaker currency to boost exports and stymie imports.

The current account deficit probably shrank to 8.4% of GDP in the first quarter from 8.9% in the fourth quarter last year, according to a Reuters survey. The central bank is forecasting a deficit amounting to 8.2% of GDP. The figures are to be released on Thursday.

The only voice of dissent in the BusinessWire survey was John Horner, foreign exchange strategist at Deutsche Bank in Sydney, who expects the kiwi will come under some downward pressure after its recent rally.

The recent pick up in risk sentiment “is puttering out a bit” with this week’s data likely to paint the economy in a negative light, he said. The kiwi’s come “too far, too fast.”

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the kiwi may trade between 62.50 US cents and 65 cents this week, with the general trend moving to “top out” on the back of weaker stocks.

The kiwi should come back around 10% to 15%, but “it depends on equities,” he said. Investors “should be selling on rallies.”

The currency will probably gain on a trade-weighted basis according to four of eight strategists and economists surveyed by BusinessWire. Three said the trade-weighted index, or TWI, which measures the kiwi dollar against the currencies of major trading partners, would hold around its current level, while one forecast it would fall. The New Zealand dollar was unchanged at 60.69 on the TWI from Friday in New York.

While the kiwi was likely to remain strong against the yen and US dollar, it would “probably underperform against the Australian dollar and the euro,” Trinh said.

Germany’s IFO survey of business sentiment will be closely watched by investors, because the world’s fourth-largest economy is a large manufacturing exporter and good indicator of the global economic cycle, Horner said.

The currency was little changed at 46.05 euro cents from 46.03 cents on Friday in New York after reaching a seven-month high earlier today.

The US will auction US$104 billion worth of Treasuries this week, and investors will be watching to see how this is absorbed. The yield on US two-year notes fell 6 basis points to 1.21%, while 10-year Treasuries slipped 5 points to 3.79%, increasing the US yield curve to 258 points.

“Should longer-dated US yields sell-off strongly, and the yield curve steepen, this will likely add downward pressure to the US dollar,” said Danica Hampton, currency strategist at Bank of New Zealand.

On the data radar this week is the Westpac Consumer Confidence survey on Wednesday, which is expected to return to positive territory, where the net number of optimists outweighs pessimists. Meanwhile, investors will keep an eye on whether May’s new home sales in the US matches the predicted pick-up in the property sector.

Businesswire.co.nz

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