NZ Dollar Outlook: Kiwi may fall as Europe, U.S. fuel recession fears

Monday 5th September 2011

The New Zealand dollar may fall this week, as investors continue to trim their holdings in riskier assets amid fears the fiscal crises in Europe and the U.S. are dragging the global economy into recession.

Six of the eight economists and market strategist surveyed by BusinessDesk saw the kiwi falling towards the lower end of its recent range this week, tracking global equities lower. One saw the kiwi gaining and one saw the currency trading sideways in the week.

The kiwi, which recently traded at 84.24 U.S cents, may trade between a median range of 82.50 cents and 85.50 cents this week, according to the poll an in line with recent levels.

Growth-linked currencies, such as the New Zealand and Australian dollar, look set to come under further pressure as the risk-off tone seen in the wake of Friday's weaker-than-expected U.S. non-farm payrolls numbers spills over into this week.

The data showed the world's biggest economy added no new jobs in the month of August, well short of the 60,000 gain anticipated by a Bloomberg poll, prompting investors to abandon their equity and growth currency holdings in favour of so-called safe haven assets such as bonds and gold amid fears that global growth was reaching stall speed.

Regional markets, following on from sharp losses in Europe and the U.S. on Friday, opened in the red with the NZX 50 Index shedding 1% to 3,271.65 at the midday mark on Monday, while Australia's S&P/ASX 200 Index opened 1.6% lower at 4,175.60.

"If we started the week with risk-off situation after the dismal non-farm payroll numbers, it's difficult for the local markets to do anything but follow the suit," said Alex Hill, manager of corporate FX at HiFX. "You have to suspect the pressure will flow on and remain on the kiwi and the Aussie," as the Australian dollar is colloquially known.

That's put the focus on Thursday, when Federal Reserve Chairman Ben Bernanke delivers a speech to the Minnesota Economic Club in Minneapolis, and U.S. President Barack Obama addresses a joint session of Congress to unveil his latest proposals to create more jobs and to boost the economy.

"If we continue to see weak data in the U.S., speculation will mount that the Fed will have to do something in response to that, possibly further monetary easing," which Bernanke may hint at in his speech, said Mike Burrowes, a market strategist at Bank of New Zealand.

The ongoing European debt saga may add momentum to the retreat in risk appetites this week as the house-of-cards policy response to it sovereign borrowing crisis looks increasingly wobbly.

Over the weekend the European Central Bank stepped up pressure on Italy's centre-right government to honour its 45.5 billion euro austerity budget commitment, amid increasing levels of domestic opposition to the deal. The austerity package is a key requirement for the ECB to continue buying Italian government debt in a bid to keep bond repayments below 6%.

Additionally, Germany's Constitutional Court is in the process of assessing whether Chancellor Angela Merkel's government broke the law when it rolled out bailouts to heavily indebted peripheral states such as Greece and Portugal. The final ruling is expected midweek.

The ECB and Bank of England are also set to make interest rates announcements this week, with both expected to remain on hold at 1.5% and 0.5% respectively.

Locally, the kiwi/Australian dollar cross rate will be in the spotlight, with the Reserve Bank of Australia expected to keep interest rates on hold at 4.75% when it meets tomorrow, with economists betting the recent global market turmoil will force the bank to trim its hawkish view. Traders are currently betting that the central bank will cut rates by 125 basis points in the next 12-months.

"The RBA have been pretty consistent with their view on economy, and the market has consistently thought the opposite," said Christ Tennent-Brown, an economist at the Commonwealth Bank of Australia in Sydney. "We'll probably see more of that this week, and it's interesting when you consider the Australian economy doing reasonably well compared to everyone else's."

The policy announcement will be backed by a raft of Australian data, with second quarter current account balance and gross domestic product numbers expected in the first half of the week, followed by the employment report for July on Thursday.

On the local data front Fonterra's Co-operative Group's GlobalDairyTrade auction is scheduled to take place on Wednesday, followed by the release of wholesale trade and building work valuation data for the second quarter, with electronic card transaction numbers for August capping the week off on Friday.

China's monthly tranche of manufacturing, retail, inflation and trade data for August is also expected on Friday, which the market will sift through to see if the weakness in western economies is spreading into emerging markets.

(BusinessDesk)

BusinessDesk.co.nz

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