NZ Dollar Outlook: Bias for a weaker kiwi as Fed mulls outlook for US

Monday 14th December 2009

The short term outlook is for a weakening New Zealand dollar as investors prepare for the Federal Reserve to review its outlook on the state of the U.S. economy amid signs chairman Ben Bernanke will have to hike rates earlier than expected.

Five of seven economists and strategists in a BusinessWire survey predict the kiwi dollar will trade in familiar ranges or push lower this week, after the greenback extended its gains on positive U.S. data for the second time since the start of the year.

Three predict it will decline this week; three expect the currency to remain range-bound, although one believes there is some positive bias; and one economist among those surveyed expects it to gain this week.

The Dollar Index, a measure of the greenback against a basket of currencies, climbed 0.7% to 76.53 after U.S. retail sales surged 1.3% and consumers were more optimistic than expected.

It’s the second time in two weeks and the third time since the start of the year that the greenback has gained on stronger economic data.

The kiwi slipped to 72.47 U.S. cents from 72.63 cents on Friday in New York, while the Australian dollar slipped to 91.04 cents from 91.61 cents.

“The complete turnaround will have significance for forex market movements. As we get a better economy, the U.S. dollar will become stronger,” said Imre Speizer, markets strategist at Westpac Banking Corp.

He expects support for the kiwi at 72 U.S. cents to break and it will “head down to 70.50 cents” on a week with a negative bias. Speizer predicts the kiwi will be capped at 73 U.S. cents this week and will test 70.50 cents as markets prepare for the Federal Open Market Committee meeting on Wednesday in the U.S.

The Fed is expected to keep rates at their depressed levels, though economists are predicting it remove the rhetoric that interest rates will stay at their current levels for an extended period.

The market has priced in 85 basis points worth of increases over the next 12 months, up from 50 points on Dec. 2.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said traders will be watching to see if the Fed acknowledges the pick-up in the U.S. economy and alters its tone on how long rates will remain at their current levels.

“The markets have been far too pessimistic on the U.S. economy – the Fed will raise rates at some stage,” he said.

He expects the kiwi will trade between 70.50 U.S. cents and 73.50 cents this week, and said it will have to break below 70.25 cents to head lower.

Last week, New Zealand’s central bank governor Alan Bollard signalled an earlier tightening of monetary policy, saying he expects interest rates to rise around the middle of next year. Previously, he had been adamant they wouldn’t increase until the second half of 2010.

Mike Jones, strategist at Bank of New Zealand, said Bollard had essentially given his approval for the markets to price in interest rate hikes, and he expects the kiwi to “drift higher” due to the central bank statement last week.

He predicts the currency will trade in the top half of a 72 U.S. cents to 74 cents range this week. Traders are betting Bollard will hike rates by 2.26 percentage points in the next 12 months, based on the Overnight Index Swap curve, up from 1.63 percentage points predicted before last week’s monetary policy statement.

The Treasury releases its half-year economic update tomorrow which is expected to show improved forecasts, while Finance Minister Bill English will give guidance on policy initiatives in his Budget Policy Statement.

Economists are mixed on how the kiwi will perform on a trade-weighted basis this week, with two predicting it will gain, two forecasting a decline, two saying it will remain range-bound, and one expecting it to trade in a range with an upward bias.

The currency gained to 65.29 on the trade-weighted index, or TWI, a measure of the currency against the greenback, yen, euro, pound and Australian dollar, from 65.15 on Friday in New York, and rose to 64.57 yen from 64.48 yen.

Investors will find out the fate of the US$3.5 billion Nakheel PJSC Islamic bond today, and if it defaults Kelleher said there will be US$2 billion of associated defaults “straight away.”

State-owned Dubai World raised the prospect that it may be forced to ask to defer repayments of debt last month, raising the prospect that some European and British banks will be take a knock due to their exposure to the Middle East.

The kiwi gained to 49.57 euro cents from 49.25 cents on Friday in New York, and gained to 44.62 pence from 44.53 pence.

Darren Gibbs, chief economist at Deutsche Bank, said the kiwi “may be more resilient” on the TWI than against the greenback, with the euro coming under pressure and the Australian dollar cross looking to be at the bottom of its range.

He expects the kiwi will trade between 78 Australian cents and 80 cents this week, though this will take its cues from third-quarter Australian gross domestic product data when it’s released on Wednesday.

On the data radar this week is American inflation, industrial production and housing data.

The Japanese Tankan business surveys come out today, while locally, the National Bank Business Outlook comes out on Thursday and the ANZ Roy Morgan consumer confidence survey will be released on Friday.

Businesswire.co.nz

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