NZ Dollar Outlook: Kiwi to be capped at 70 US cents amid European chaos

Tuesday 25th May 2010

The New Zealand dollar will likely be capped at 70 US cents this week with continued chaos in Europe over its sovereign debt crisis keeping the knockers on investors’ appetite for risk.

Six of seven economists and strategists in a BusinessWire survey predict the kiwi dollar will be capped at 70 US cents or below this week as ongoing fears about Europe’s debt woes plague investors’ enthusiasm for higher-yielding assets.

The last one didn’t expect it to break out of a range of between 66 US cents and 68 cents, though it faced more risks to the downside. Three of the six have an upward bias on the kiwi after its biggest weekly decline since October last week.

The kiwi sank to a nine-month low last week as equity markets around the world tumbled as Germany and France introduced bans on the naked short-selling of certain stocks. Naked short-selling is where traders sell an asset in the expectation of buying it a cheaper rate without actually holding the stock.

Since then, investors’ nerves have settled somewhat after the German Parliament approved Europe’s biggest economy to participate in the bail-out package for Greece and the stabilisation fund for the region. The kiwi fell to 66.92 U.S. cents from 67.35 cents yesterday, and dropped to 54.12 euro cents from 54.30 cents.

“The markets are chaos, and the New Zealand dollar is under pressure as everybody heads for the hills,” said Derek Rankin, director at Rankin Treasury Advisory Limited. “The overreaction was huge – the New Zealand dollar got supported at the 66.65 US cents area, and I don’t think it will sustain the move down.”

Rankin predicts the kiwi will start to push back towards 70 US cents this week as investors get more upbeat about the state of the world, with 67.70 cents a strong level of resistance on the topside.

Ben Potter, research analyst at IG Markets in Melbourne, said the kiwi and Australian dollars had been overwhelmed by the pessimistic outlook last week, but this was likely to change as investors step back and reassess their view on the world.

The Chicago Options Board Exchange Volatility Index, or VIX, commonly known as Wall Street’s ‘fear gauge’, has eased back to 38.23 from a 13-month high 45.79 last week, more than twice its 60-day moving average.

“We should see a recovery in risk appetite over the next few days, unless we get some leftfield data out of Europe,” Potter said.

Imre Speizer, markets strategist at Westpac Banking Corp. said the kiwi dollar will probably trade between 66 US cents and 70 cents this week with the threat of Europe’s sovereign debt crisis spreading continuing to weigh on investors’ minds. That will keep all eyes focused on equity markets, the VIX, the euro, and funding costs as traders struggle to forecast in the volatile environment.

Fonterra Cooperative Group, the world’s largest dairy exporter, may boost its forecast pay-out to farmers today following a board meeting after dairy prices surged as buyers restocked inventories and paid a premium to secure supply amid drought conditions in Australia and New Zealand.

Last month, Fonterra raised its forecast pay-out to farmers for this season to $6.05 per kilogram of milk solids. Any increase in the forecast should underpin support for the kiwi, though it probably won’t be enough to take it higher, according to Westpac’s Speizer.

Chris Tennent-Brown, economist at Commonwealth Bank of Australia, said he will be following New Zealand’s April credit aggregates, which shows the level of credit among households and businesses. The Reserve Bank last week indicated lenders need to boost credit to business to help underpin a sustainable recovery.

Tennent-Brown predicts the kiwi will trade between 66.50 US cents and 69.50 cents this week. Five of seven strategists surveyed by BusinessWire are neutral on the trade-weighted basis for the kiwi, with the short squeeze higher and prevalent risk aversion sapping gains on the cross-rates.

The kiwi fell to 65.12 on the trade-weighted index, or TWI, from 65.43 yesterday, and sank to 60.42 yen from 60.75 yen. It declined to 46.37 pence from 46.46 pence yesterday. Westpac’s Speizer predicts the kiwi will pull-back to 80.50 Australian cents as interest rate expectations get overdone.

Traders have started pricing in a 40% chance of a rate cut by the Reserve Bank of Australia, he said. The kiwi dropped to 80.92 Australian cents from 81.14 cents yesterday.

The RBA was the first G-20 nation to begin tightening monetary policy, and the prospect that it was near the end of its cycle while the Reserve Bank of New Zealand gets close to hiking the official cash rate has seen investors’ support flow towards to the kiwi. Traders are betting the RBNZ will hike the OCR by 154 basis points over the coming months, down from 215 basis points of increases priced in on May 6.

On the data radar this week is the central bank’s second-quarter survey of inflation expectations, though it isn’t expected to capture the impact of last week’s budget. April’s trade balance and building are released on Thursday and Friday and are expected to show improvements in New Zealand’s economy.

The US is to release first-quarter GDP data on Friday. White House economic adviser Lawrence Summers said the US faces a balancing act between helping drive economic growth and trying to rein in its budget deficits.

Businesswire.co.nz

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