Dollar outlook: Kiwi to trail Aussie higher

Monday 11th October 2010

The New Zealand dollar will likely extend its run higher this week as the Australian currency looks set to test parity with the greenback, dragging the kiwi along with it.

All six economists and strategists in a BusinessDesk survey predict the kiwi will get pulled higher this week as investors keep shunning the US dollar after soft employment data stoked the prospect of more quantitative easing next month.

Four of the economists had concerns about the extreme level of speculative short positions in the greenback, which could result in a sharp snap back. Short-selling is where an investor sells in the expectation they can buy back an asset at a cheaper price.

The kiwi dollar extended its march high after it gained 1.4% last week as America's private sector added fewer jobs than expected last month, heightening the prospect the Federal Reserve will ramp up its asset purchase programme next month.

The kiwi rose to 75.67 US cents from 74.95 cents on Friday in New York.

The weakness in the greenback has seen investors flock to the Australian dollar, which is toying with parity for the first time since the Aussie unit floated, in 1983. It rose to 99.01 US cents from 97.92 cents on Friday.

"It's not if, but when - we now formally have parity forecast this year and I wouldn't be surprised if the Aussie goes all the way to US$1.05," said Robert Rennie, chief currency strategist at Westpac in Sydney.

If the Australian dollar hit parity, "we'd need to be thinking a move towards 80 US cents from the kiwi's point of view".

Rennie predicts the kiwi will probably test the upside with the US dollar staying under pressure after policy makers at the International Monetary Fund and Group of Seven Nations meetings in Washington failed to get any kind of accord over other major economies' growing desire for weaker currencies.

The G20 meeting of finance ministers later this month and the G20 leaders' meeting will be the next opportunity for policy makers to try and ease the calm in the so-called currency war, he said.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the extremely high level of short positions in the greenback is the biggest threat to its weakening trend.

Speculative investors are holding US$31 billion in short positions. That's three-times the long-run average, and the highest level since November 2007.

"The last time the US dollar reversed (a position this extreme), it went 25% in three months," he said.

He predicts the kiwi will trade between 74.25 US cents and 76.25 cents this week. A main risk factor for currency markets this week will be American consumer price index data on Friday in the US.

Last month, the Fed indicated it was concerned about the low level of inflation, and after failing to keep employment in check, it's now focusing on price stability.

Derek Rankin, director at Rankin Treasury Advisory, said the Fed has seen where the path of deflation took Japan, and has to focus on prices as it prepares for a second round of quantitative easing.

All six economists were less upbeat on the kiwi's prospects against other major trading partners' curreinces, predicting it will stay flat on the trade-weighted index.

The kiwi rose to 67.02 on the TWI from 66.72 on Friday in New York, and rose to 61.89 yen from 61.783 yen.

It increased to 54.05 euro cents from 53.80 cents last week, and advanced to 47.42 pence from 47.26 pence.

Westpac's Rennie said he's surprised the kiwi has held above 76 Australian cents. Though last week's pause by the Reserve Bank of Australia forced some speculative positions out, the divergence between the trans-Tasman economies and their respective central banks should see the Australian dollar stronger, he said.

The kiwi slipped to 76.40 Australian cents from 76.51 cents on Friday in New York.

On the data radar this week is local retail sales for August and manufacturing data out on Thursday, along with the government's full-year accounts and housing data. Tomorrow's Australian business confidence survey will be noted. Investors will be watching Chinese trade data on Wednesday, and US retail spending, manufacturing and consumer confidence round out the week on Friday.

Businesswire.co.nz

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