NZ Dollar Outlook Kiwi to breach 85 cents as greenback stays out of favour

Monday 17th December 2012

The New Zealand dollar looks set to breach 85 US cents for the first time in 15 months provided third-quarter growth figures don't disappoint and Washington remains stalled on fiscal cliff talks.

The kiwi dollar recently traded at 84.60 US cents from 84.56 cents in New York on Friday. The trade-weighted index rose to 75.45 from 75.31.

The local currency may trade in a range of 83.50 US cents to 85.70 cents this week, according to a BusinessDesk survey. The kiwi dollar may ease back from its highs toward the end of the week and is looking somewhat "stretched" versus the yen after surging to a four-year high today on the landslide victory of Japan's Liberal Democratic Party, whose aims including weakening the yen.

Politicians in Washington are running out of time to find agreement on averting the fiscal cliff, which kicks in on Jan. 1 with some US$600 billion of tax hikes and spending cuts that could push the world's biggest economy into recession in 2013. Late on Saturday, a source told Reuters that President Barack Obama was unmoved by a Friday proposal from US House Speaker John Boehner.

It is a data-heavy week on the home front, with third quarter balance of payments figures due on Wednesday and gross domestic product on Thursday. Gross domestic product slowed to a 0.5 percent in the three months ended Sept. 30, according to a Reuters survey of nine economists, after a 0.6 percent expansion in the second quarter. Forecasts ranged from zero growth of 0.7 percent, suggesting there's a risk of a weaker outcome that would weigh on the kiwi.

"Overall I think we will see the kiwi run out of puff after pushing up to the 85 cents mark," said Dan Bell, currency strategist at HiFX. "If the fiscal cliff gets resolved we could see quite a significant correction. The US economic growth outlook is still a lot better than for a lot of other countries."

The kiwi dollar didn't move much after the Westpac McDermott Miller Consumer Confidence Index rose 8.6 points to 111.1 in the December quarter, the highest level since September last year, while the Performance of Services Index for November came in at 54.1, down from the previous strong month though still indicating expansion.

The government releases its half year economic and fiscal update tomorrow at 12:30pm and economists are looking for an indication on whether it still expects to return to budget surplus in 2015, given the economy's recovery has been at a slower pace, with tax income down.

The balance of payments for the third quarter is out on Wednesday, which is expected to show the current account deficit widened to $4.83 billion in the three months ended Sept. 30 from $1.8 billion in the second quarter, according to a Reuters survey. The annual deficit narrowed to $9.83 billion, or 4.8 percent of GDP, from $10.1 billion, or 4.9 percent.

Along with New Zealand GDP on Thursday, traders across Asia will also be awaiting the Bank of Japan's monetary policy decision, which is expected to confirm interest rates near zero.

The New Zealand dollar jumped as high as 71.46 yen today, the highest since September 2008, from 70.57 yen in New York on Friday. It has since eased back to 71 yen.

The LDP and junior partner New Komeito won at least 320 of the 480 seats in the lower house in Sunday's election, a two-third majority, Nikkei reported. That gives it enough power to pass laws even in the face of opposition in the upper house.

Tim Kelleher, head of institutional FX sales at ASB Institutional, said there is "strong resistance" at 71.50 yen to 72 yen and traders would also be taking profits on US dollar-yen as Japanese exporters take on cover.

"The forecast was always for a change of government," he said.

Friday rounds out the week with New Zealand tourist arrivals and credit card billings for November.

Peter Cavanaugh, an adviser at Bancorp Treasury Services, said trading volumes are reducing in the run-up to the Christmas-New Year break.

"Liquidity is very light so the kiwi is vulnerable to being pushed around by the smallest of trades," he said.

BusinessDesk.co.nz

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