NZ Dollar Outlook: Kiwi may gain vs greenback ahead of budget

Monday 25th May 2009

The New Zealand dollar may gain versus the greenback this week ahead of the budget on Thursday as investors eschew the world’s reserve currency on fears about the state of the US economy.

Four of seven strategists and economists in a BusinessWire survey predict the currency will gain against the US dollar this week while it weakens versus the other crosses. Two forecast it will consolidate against the greenback and fall against the other major currencies, while one expects it to gain across the board this week.

Concerns about the rising fiscal deficit in the US and fears of a credit downgrade for the world’s largest economy encouraged investors to flee the US dollar in favour of the euro and the pound. The greenback also has been hit by concerns the US may have its AAA credit rating downgraded as it faces multi-trillion dollar deficits. President Barack Obama told C-SPAN “we are out of money now” after his administration salvaged the financial system and bailed out the auto industry.

“The U.S. dollar slide should be a positive for the kiwi,” said Imre Speizer, currency strategist at Westpac Banking Corp. This week should be “very volatile, and we’re likely to see the currency weaker against other risk currencies like the Aussie,” he said, referring to the Australian dollar by its colloquial name.

The kiwi climbed 3.8% to 61.68 US cents in the past week, while the euro gained 3.5% to US$1.4025. The Australian dollar rose 2.3% to 78.25 US cents in the past seven days, and the yen gained 1.6% to 94.66 yen per US dollar.

New Zealand’s sovereign credit rating has been under scrutiny when Standard & Poor’s put the nation’s AA+ foreign currency rating on negative outlook in January as the country’s current account deficit grew to 8.9% of gross domestic product in the three months to December. Prime Minister John Key downplayed the prospect of a cut to the rating, and told TV One’s Breakfast programme that Finance Minister Bill English was “on top of the debt curve.”

Standard & Poor’s credit analyst Kyran Curry told the NZ Herald the government needs to return to fiscal surpluses within five years, although S&P would tolerate a modest operating deficit. Key later told NewstalkZB it may take longer than five years to return to operating surpluses.

“We believe Standard & Poor's will refrain from downgrading New Zealand's sovereign rating over the near term,” said Danica Hampton, currency strategist at Bank of New Zealand. “It’s important to note Fitch and Moody’s have ratings a notch higher” than S&P, and either agency may take the opportunity to put New Zealand’s rating on a negative outlook, she said.

Support for the U.S. dollar may come unstuck if investors fail to support this week’s auction of U.S. Treasury Bonds. Some US$101 billion of two-, three- and seven-year bonds are being offered, and if pessimism over the American budget deficit persists and yields continue to rise, the greenback may continue to struggle, said Hampton.

With anecdotal signs pointing to a pick-up in the domestic economy and the ongoing weakness of the U.S. dollar, the kiwi will probably extend its gains against the currencies of all its major trading partners this week, said Darren Gibbs, chief economist at Deutsche Bank.

He was the only strategist predicting a gain across the board, and said it may trade between 60.80 US cents and 63 cents this week. When the National Bank Business Outlook, a survey of business sentiment, is released this week, it will probably show a slight pick-up in the economy, and “if we avoid a downgrade, there will be a sigh of relief,” he said.

The U.S. Agriculture Department reintroduced subsidies for some 92,000 metric tons of American dairy exports. The New Zealand dollar pared its gains on the news, and Trade Minister Tim Groser and Fonterra Cooperative Group aired their disappointment with the move.

The world’s largest exporter of dairy products will announce its forecast earnings for the season this week, and if it’s below the expected NZ$5.20 per kilogram, it could drag the kiwi down, Speizer said.

If the New Zealand dollar continues its strong run, it may pressure the Reserve Bank of New Zealand to jawbone the currency lower, said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. Governor Alan Bollard forced the currency down in April when he released a statement indicating his displeasure at the high level of short-term interest rates.

Bollard appears to be comfortable with the current level of the dollar, but he will need to be “more forceful” than his April statement if he wants to force it lower, Trinh said. She predicts the currency may trade between 61.20 U.S. cents and 63 cents this week, but if investors continue to eschew the greenback, it could reach as high as 65 cents.

On the radar this week will be the latest trade figures, which are expected to show an increase in the monthly trade balance to NZ$386 million, according to a Reuters survey.

Building consents are due on Friday, but it may be too early to see a pick up in the housing sector, Gibbs said.

Investors will also be watching the slew of U.S. data out this week, which includes preliminary GDP data, and confidence. The RBNZ will also release its survey of inflation expectations tomorrow, which will probably show inflation is predicted to stay within the central bank’s target range.

Businesswire.co.nz

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