NZ Dollar Outlook: May fall as ECB flounders, OCR cut awaited

Monday 20th April 2009

The New Zealand dollar may extend its slide this week amid concern the European Central Bank is dithering over its response to the recession, while New Zealand’s central bank prepares to slash interest rates to below 3%.

he currency is heading lower this week according to six of seven strategists and economists in a BusinessWire survey. Four predict it will drop as low as 55.50 US cents, the lowest in a month. The kiwi fell to 56.62 US cents today, holding near a three-week low, from 57.22 cents on Friday in New York.

“The ECB is sending mixed signals, and that’s a problem,” said Imre Speizer, currency strategist at Westpac Banking Corp. “The markets think Europe should be the next to slip into a deep recession.”

The prospects of a prolonged recession in Europe may sap investor appetite for higher yielding, or riskier assets in favour of holdings of the US dollar, the world’s reserve currency. The euro fell against most major currencies on speculation the disunity between policy makers will undermine attempts to revive growth in the region. ECB President Jean-Claude Trichet has ruled out a zero interest rate policy, while hinting the benchmark rate could fall to 1% next month. Against the greenback, the euro dropped to $1.3036 from $1.3088 last week.

“Investors fear policy makers aren’t doing enough to safeguard the Eurozone economy,” said Danica Hampton, currency strategist at Bank of New Zealand. “The fact is that economies in Europe have breached the standards” required for European Union membership, she said.

The New Zealand dollar last traded at 43.70 euro cents, unchanged from last week. The kiwi slipped to 56.60 yen from 56.86 yen last week.

Amid evidence of deteriorating economies within the EU, Ireland’s fiscal deficit rose to 10% of gross domestic product, more than three times the 3% level dictated by the Maastricht limit. That nation is facing legal proceedings from the EU. Moody’s placed the country’s sovereign AAA rating on review. Fitch and Standard & Poor’s rating services both already downgraded Ireland’s rating to AA+.

New Zealand’s central bank is expected to slash the official cash rate by 50 basis points to a new record-low 2.5% on April 30. That will give nearest neighbor and biggest export market Australia a yield advantage after its central bank cut its cash rate target to 3% this month, matching the OCR.

RBNZ Governor Alan Bollard said on April 1 that rates are likely to stay low for an “extended” period of time.

The Australian dollar will probably benefit from the yield differential as the RBA has probably reached a trough in its monetary easing, according to ANZ National Bank economists. The kiwi fell to 78.78 Australian cents from 79.32 cents last week.

US corporate earnings continue this week, with Bank of America, Microsoft, and McDonald’s due to report. First-quarter earnings for companies in the Standard & Poor’s 500 were expected to drop 37%, according to estimates from more than 1,700 analysts in a Bloomberg survey.

Investors will be watching the US Treasury when it announces the methodology for the stress-testing of corporate banks on Friday. President Barack Obama said he will demand “accountability” from any banks that require additional tax-payer bailouts following the stress-testing, at the Summit of the Americas in Trinidad and Tobago.

Group of Seven and Group of 20 finance ministers will meet in Washington at the end of the week ahead of International Monetary Fund and World Bank meetings later this month.
On the radar this week is the German Ifo Business Climate Index, UK GDP, and Eurozone manufacturing data.

“Any sign that the Eurozone economy is deteriorating will likely add to the downward pressure on euro/US dollar cross,” said BNZ’s Hampton.

Businesswire.co.nz

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