Dollar Outlook: Kiwi may fall as greenback finds favour again

Monday 15th June 2009

The New Zealand dollar may fall this week as support for the greenback revives following finance ministers reaffirming their support for the world’s reserve currency, and signs the global economic slump may abate sooner than expected.

Four of seven strategists and economists in a BusinessWire survey predict the kiwi dollar will drift lower this week as demand for the US dollar is stoked by markets preparing for the end of the downturn. The other three expect the currency to push higher as improved business and consumer confidence encourage investors to seek high-yielding, riskier assets.

The Dollar Index, a measure of the US dollar versus six of its major trading partners, rose 0.1% to 80.13 after weaker-than-expected manufacturing data in the Euro-zone raised concerns about the health of the region’s economy, and the Russian and Japanese finance ministers reaffirmed their support for the greenback as the world’s reserve currency.

G-8 finance ministers discussed exit strategies from their various stimulatory measures as the prospect of an economic recovery at the end of this year improves.

“The US dollar was overdone on the downside, and we should expect a flip” which will drag the kiwi lower, said Imre Speizer, currency strategist at Westpac Banking Corp. Comments from the Russian and Japanese finance ministers “were positive for US Treasuries and the US dollar.”

The kiwi slipped to 63.83 US cents from 63.95 cents on Friday in New York.

Reserve Bank Governor Alan Bollard held the official cash rate at 2.5% last week and said the bank had a more positive outlook with economic conditions beginning to stabilise. He said the high New Zealand dollar created “unhelpful tensions” for an export-driven recovery.

New Zealand can expect a pick-up in the housing market as net migration increases and the fall-off in new building consents helps demand outstrip supply, Bollard said.

Interest rates gained after the RBNZ announcement as investors begin to prepare for the recovery, and bet the central bank will lift the OCR earlier than expected after the bank forecast the 90-day bank bill will rise to 2.9% from 2.8% in the second half of next year.

Danica Hampton, currency strategist at Bank of New Zealand, said the central bank’s key message that interest rates would remain at low levels for a sustained period was lost, and the upbeat tone encouraged more support for the kiwi. She predicts the currency will push slightly higher this week.

“Bollard will be unhappy with the market reaction last week,” she said. “Markets are already pricing in rate hikes.”

Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney, predicts the kiwi will gain this week and faces a risk in the short-term of rising to 68 US cents.

“It should be well underpinned with pretty good demand for yields out of Japan,” she said. The currency was little changed at 62.76 yen from 62.79 yen on Friday in New York.

Trinh said the currency may trade between 63 US cents and 65.50 cents this week as appetites for risk increased on the current bout of optimism.

The currency will probably decline on a trade-weighted basis according to three of seven strategists and economists surveyed by BusinessWire. Two said the trade-weighted index, or TWI, which measures the kiwi dollar against the currencies of major trading partners, faced upward pressures, while the remaining two predicted it would stay in its current range.

The Reserve Bank of Australia releases its minutes tomorrow, and Philip Borkin, economist at ANZ National Bank, will be looking for any comment on the Australian and American currencies.

The kiwi jumped to 78.98 Australian cents from 78.80 cents on Friday in New York.

Weaker-than-expected data weighed on the euro, as Euro-zone industrial output slid 1.9% from March, and tumbled a greater-than-expected 21.6% from a year earlier, according to the European Union’s statistics office in Luxembourg.

The kiwi gained to 45.62 euro cents from 45.55 cents on Friday in New York.

With little domestic data on the radar this week, housing and manufacturing statistics in the US will be watched over the next two days. Germany’s ZEW survey of business confidence will also offer guidance when it’s released tomorrow.

Businesswire.co.nz

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