Dollar outlook: Kiwi may fall amid rising risk aversion

Monday 2nd November 2009

The New Zealand dollar may fall this week as investors get jittery about the speed and strength of the global recovery and flock back to so-called safe-haven currencies such as the US dollar and yen.

Four of seven economists and strategists in a BusinessWire survey predict the kiwi will decline this week as traders grow nervous about the sustainability of the US economic recovery, and eschew higher-yielding, or riskier, assets. Two forecast the currency will consolidate in its current range, and the last anticipates the kiwi will edge higher after it slumped 4.8% against the greenback last week.

Among events eroding investors’ risk appetite, CIT Group, the 100-year-old lender to small and medium-sized businesses, filed for bankruptcy today, and will probably cost American taxpayers around US$2.3 billion through the Troubled Asset Relief Program. Stocks tumbled around the world amid renewed fears about the state of the US financial sector.

Concerns were heightened by the Securities and Exchange Commission drawing close to settling with institutions, including Bank of America and UBS, after a three-year investigation into the manipulation of municipal bonds, the Wall Street Journal reported. The Dow Jones Industrial Average sank 2.5% on Friday in New York.

“The kiwi has crashed back to earth with a thud last week, and will probably struggle through this week,” said Mike Jones, strategist at Bank of New Zealand. “Equity markets have renewed concerns about the US financial sector, and the last few releases of data have justified this sentiment.”

Jones predicts the kiwi will fall this week, with strong initial support around 70.50 US cents. If this breaks, the next key level will be at 69 cents. The currency recently traded at 71.49 cents from 72.90 cents on Friday in New York.

The main even for the kiwi this week will be the raft of central bank meetings, starting with the Reserve Bank of Australia’s review of interest rates tomorrow.

The RBA, which became the first G-20 nation to begin tightening monetary policy last month, is expected to hike rates 25 basis points to 3.50%, giving it a 100 point yield advantage over New Zealand.

Khoon Goh, senior markets economist at ANZ National Bank, said this should give the markets a greater reason to take up the Australian dollar in favour of the kiwi.

“Our central bank will hold rates until the second half of next year, creating a further differential in yield with Australian,” he said.

The kiwi was little changed at 79.62 Australian cents from 79.70 cents on Friday in New York.

The Federal Open Market Committee, European Central Bank and Bank of England will also review their respective monetary policies this week. New Zealand’s unemployment data for the third quarter will be released on Thursday, and the jobless rate probably rose to 6.4%, according to a Reuters survey, the highest level since March 2008.

Imre Speizer, markets strategist at Westpac Banking Corp., doubts the employment data will have much of an impact on the currency unless it throws up a large surprise. He predicts unemployment will hit a peak of around 6.7% in the three months ended December.

Speizer is the lone voice of dissent, and predicts the kiwi will push back towards 73 US cents this week after its biggest weekly slump since January.

Fonterra’s online dairy auction on Tuesday in the US could underpin support for the kiwi if dairy prices continue to hold. The price of milk power has surged about 65% from its low in July as purchasers begin to replace their depleted stockpiles.

Derek Rankin, director at Rankin Treasury Advisory expects the kiwi will extend its losses this week amid the strong risk aversion, and he advises exporters to buy New Zealand dollars on dips below 70 US cents as the currency is still in a long-term uptrend.

“This week will be a good time for exporters to get in and get some cover” against all of the major currencies, Rankin said. “86% of companies on the S&P 500 met or beat profit expectations” and this indicates the recent risk aversion should only be temporary, he said.

Six of seven strategists surveyed predict the kiwi will decline on a trade-weighted basis, as the negative global sentiment sees investors sell-off their kiwi dollars.

The New Zealand dollar fell to 64.52 on the trade-weighted index from 65.48 on Friday in New York, and slumped to 64.36 yen from 66.32 yen. It sank to 43.58 pence from 44.05 pence on Friday in New York, and dropped to 48.63 euro cents from 49.16 cents.

Other highlights offshore this week include non-farm payrolls on Friday in the US.

Locally, the ANZ National Bank Commodity index tomorrow will indicate if support for raw materials is holding up, and Reserve Bank of New Zealand Governor Alan Bollard will give a speech on the economy on Thursday.

Businesswire.co.nz

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