NZ Dollar Outlook: Kiwi to gain as Euro leaders meet

Monday 21st May 2012

The New Zealand dollar may rise this week as European leaders are expected to urge Greece to stay in the euro zone, while at home the government is set to deliver a "zero budget" as it aims to return to surplus.

The New Zealand dollar recently traded at 75.55 US cents. That's right in the middle of this week's predicted trading range of 73.70 cents to 78.50 cents, according to a poll of six analysts by BusinessDesk.

Of the analysts surveyed, three said the kiwi will finish the week higher, one lower and two unchanged.

European Union leaders will meet in Brussels on Wednesday to discuss how to bolster growth ahead of a summit planned for next month. Greece remained the main talking point at the weekend's Group of Eight nations conference in Washington DC. Leaders agreed on "the importance of a strong and cohesive euro-zone for global stability and recovery, and we affirm our interest in Greece remaining in the Euro zone while respecting its commitments."

"One relief for the kiwi at the moment is that the G-8 is talking about standing by Greece and the euro - the New Zealand dollar is being supported now by that talk," said Peter Cavanaugh, senior client adviser at Bancorp. "Greece is a small part of the euro but it is the potential contagion of the Greek disaster to spread to the rest of the euro, and Spain is showing similar symptoms - you can't forget Portugal and Ireland too."

There was little agreement between the G-8 nations, with divisions evident over the need for growth versus austerity measures.

The New Zealand dollar recently traded at 59.20 euro cents, little changed from 59.10 cents at 8am this morning as uncertainty about Greece fiscal and political situation continues. Last week, Fitch Ratings downgraded the indebted nation's credit rating one level to CCC from B-, citing "heightened risk" that the nation will not be able to sustain EU membership.

About half of investors surveyed by Bloomberg predict a Greek exit from the euro-zone this year as nation's political instability threatens to push the debt crisis to new depths.

In New Zealand this week, Finance Minister Bill English on Thursday will outline how the government plans to return to surplus by 2014/2015, a strategy that's likely to curb new spending.

The Treasury forecasts for the budget predict a $640 million deficit this fiscal year, thanks largely to a declining tax take, a drop in investment returns, and weak economic growth. Prime Minister John Key has already warned the Cabinet will tighten the tax system and prune government spending.

The budget "should overall retain the government's goal of getting back to surplus," said Imre Speizer, market strategist at Westpac Banking Corp. A no-surprises budget is likely to see the kiwi little changed, he said.

It is a data heavy end to the week in Europe, with the region's current account and consumer confidence due out on Wednesday. That's followed by Europe's performance and manufacturing index and Germany's May business sentiment survey on Thursday. The survey should provide further insight on whether the region's largest economy is at risk of losing momentum as the debt crisis spreads.

New Zealand's second-largest export market China, will also release its HSBC flash purchasing manufacturing index, the nation's unofficial measure of PMI on Thursday.

"If that is a poor number then we will see bearish sentiment in Asia - you are going to see a continued sell off," said Daniel Brdanovic, head of institutional sales global markets at HSBC.

The New Zealand dollar rose to 59.89 yen from 59.75 yen as the Bank of Japan prepares to meet this week. A better-than-expected 4.1 percent annualised increase in gross domestic product for the final three month of last year, may mean the central bank holds off boosting asset purchases.

The BOJ now regards asset purchases as its key monetary easing tool. It is expected to hold interest rates in its target range of zero to 0.1 percent.

The Bank of England will release the minutes from its May meeting on Wednesday. The bank's base rate currently remains unchanged at 0.5 percent.

In the world's largest economy, the US, economic data is thin with existing homes due out on Tuesday and new home sales figures out on Wednesday. Initial jobless claims and durable goods orders will be released on Thursday.

America's earnings season is almost over, minus a few stragglers following Facebook's initial public offering on Friday. Shares in the social networking site rose just 0.6 percent to $38.23 in its first day of trading.

New Zealand's international travel and migration figures for April out this morning showed the number of New Zealanders packing their bags and heading to Australia accelerated in April, with a new record of annual departures at 53,462.

The Reserve Bank's credit card statistics for April will be released this afternoon, followed by the central bank's survey of expectations for June quarter tomorrow.

"It's probably a fairly low reading that doesn't disturb the Reserve Bank that much," Speizer said.

National Bank of New Zealand's regional trends survey is also scheduled for release on Tuesday.

Fonterra Cooperative Group, the world's biggest dairy exporter, will release its first 2012/2013 dairy payout forecast this week. Prices in Fonterra's GlobalDairyTrade auction have shed 41 percent over the past 12 months, reflecting a slide in commodity prices as traders factor in weaker demand from China, European uncertainty which has helped drive up the US dollar.

Overseas merchandise trade figures for April from Statistics New Zealand will be released on Thursday.

BusinessDesk.co.nz

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