Dollar outlook: Kiwi sapped as sentiment sours

Monday 18th May 2009

The New Zealand dollar may fall this week as optimism wanes for a speedy recovery in the global economy and investors return to safe-haven currencies such as the greenback and yen.

Six of seven strategists and economists predict the currency will fall this week, with the seventh saying it will hold around its current level, according to a BusinessWire survey.

Risk appetite evaporated after European economies shrank more-than-expected in the first three months of the year, and US stocks extended their slide on Friday.

The Chicago Board Options Exchange volatility index, or VIX, climbed 5.6% on Friday as Wall Street investors on Wall Street eschewed high-yielding, or riskier, assets. The kiwi fell to 58.49 US cents today from 58.88 cents on Friday in New York.

The kiwi “will be driven by global events and equities,” with local data limited this week, said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. “The downside is a greater risk and if it breaks through 58.30 US cents” there’s room for it to fall further, she said. Trinh was one of two analysts to correctly call the currency lower last week.

The Euro-zone economy shrank 2.5% quarter-on-quarter in the first three months of the year, faster than the 2% forecast by economists, while the German economy slumped 3.8% in the first quarter, the largest contraction since 1970. The euro slid to US$1.3456 from US$1.3559 on Friday in New York as investors returned to the relative safety of the greenback and yen. The kiwi was little changed at 43.45 euro cents from 43.41 cents last week.

US consumer confidence rose, with the Reuters/University of Michigan preliminary index of consumer sentiment up to 67.9 this month from 65.1 in April, and Federal Reserve figures showed US industrial production fell 0.5% last month, the smallest decline since October. The better-than-expected American data failed to lift Wall Street, with the Standard & Poor’s 500 index falling 5% last week, its biggest decline since March.

“The US data numbers weren’t enough to lift sentiment,” said Danica Hampton, currency strategist at Bank of New Zealand. She predicts the currency will trade between 57.50 US cents and 59.50 cents this week, and will eventually fall back to 55 cents in the next couple of weeks.

The Federal Open Market Committee will release its minutes this week, and investors will look to see if the Fed plans to address rising bond yields in the US. If yields continue to rise, there’s a risk of the world’s largest economy prolonging its recession unnecessarily, said RBC’s Trinh.

The Reserve Bank of Australia’s minutes out tomorrow could give investors an indication of whether the RBA will go another 25 basis points when it reviews the policy interest rate on June 2. The Australian central bank left the cash rate unchanged at 3% when it met earlier this month.

If the RBA fails to cut rates, New Zealand’s central bank “could be pushed into more unorthodox” measures, after Governor Alan Bollard stated New Zealand’s official cash rate would have to remain competitive with its trans-Tasman neighbour, Trinh said. Last month, Bollard told a conference he didn’t think quantitative easing would be effective in addressing a tightening market in New Zealand.

Prime Minister John Key told CNBC last week that the New Zealand dollar’s decline below 80 Australian cents “makes sense” given the relative size of the two economies and the fact that Australia isn’t technically in recession yet. The kiwi gained to 78.07 Australian cents from 77.84 cents on Friday in New York.

The trans-Tasman currencies will probably struggle against the relative safety of the greenback and the yen this week, said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. He predicts the kiwi will trade between 55.50 US cents and 59.80 cents this week and will probably follow US equities.

He said the kiwi should probably be supported around 55-56 US cents with Rabobank issuing a $419 million uridashi bond. The kiwi dropped to 55.61 yen from 56.86 yen on Friday in New York.

Japan’s first-quarter gross domestic product data is expected to fall 4.2% quarter-on-quarter according to a Reuters survey, and could underscore the decline in global sentiment. The yen gained to 55.61 per US dollar from 55.86 per dollar on Friday in New York.

Darren Gibbs, chief economist at Deutsche Bank, said the currency will probably trade in a very narrow range this week with little to move it around. The only analyst not to predict a fall, he forecasts it will trade between 58 US cents and 59 cents this week.

In a relatuively quiet week for economic releases, investors are awaiting April’s credit card spending data for signs consumer confidence is picking up following the March retail figures, while the the ZEW survey out tomorrow in Germany could show global sentiment is still deteriorating.

Businesswire.co.nz

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