Dollar outlook: May fall on RBNZ rates review, pandemic fears

Monday 27th April 2009

The New Zealand dollar may fall this week as the Reserve Bank prepares to slash interest rates below 3%, and concern grows over the implications of a swine flu outbreak in Mexico spreading around the world.

The currency is heading lower according to six of seven strategists and economists in a BusinessWire survey. Two predict it will push down to 55 US cents, the lowest in more than a month.

The kiwi pared its gains from Friday as markets digested the implications of a possible outbreak of swine flu among Auckland school children who returned from a trip to Mexico.

The kiwi fell to 56.71 US cents from 57.19 cents earlier this morning. It traded at 56.56 cents on Friday in New York.

“If swine flu proves to be an aggressive form, it’s likely to impact on confidence,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “Given the risk coming into the RBNZ review, we could expect the New Zealand dollar to underperform.”

Economists predict Reserve Bank Governor Alan Bollard will cut interest rates by 50 basis points to a record low 2.5%, according to a Reuters survey. The central bank has slashed 5.25 percentage points from the OCR since embarking on the steepest series of cuts to the rate since its inception a decade ago.

Ten children tested positive for type-A flu, and are likely to be infected with the new strain of the disease which killed 81 people in Mexico, according to Minister of Health Tony Ryall. A worldwide influenza pandemic would strain New Zealand’s tourism sector, which accounts for about 10% of the nation’s economy and is the largest source of foreign exchange.

Reports of the New Zealand flu link wiped earlier gains in the currency that were fuelled by upbeat comments from Group of Seven finance ministers that the global economy may stage a “weak” recovery this year.

The kiwi was little changed at 42.84 euro cents from 42.76 cents. Deutsche Bank chief economist Darren Gibbs was the only person in the survey to call the kiwi higher this week.

Gibbs said improving offshore sentiment could help lift the currency as could a decision by the RBNZ to cut the OCR by only 25 basis points. He predicted a range this week of 56 US cents to 60 cents.

A cut to New Zealand’s benchmark interest rate will give nearest neighbor and biggest export market Australia a yield advantage after its central bank cut its cash rate target to 3% this month, matching the OCR.

The Australian dollar is likely to benefit from the yield differential as the Reserve Bank of Australia probably reached a trough in its monetary easing, according to ANZ National Bank economists. The kiwi was little changed at 79.03 Australian cents from 78.99 cents on Friday in New York.

“It’s difficult to see the Reserve Bank (decision) as a catalyst” for pushing the currency to new lows, said Philip Borkin, economist at ANZ National Bank. The kiwi “will be hostage to global developments in the early part of the week.”

Appetite for high-yielding, or riskier, assets rose before the extent of flu outbreak was known as better-than-expected earnings lifted Wall Street. The Dow Jones Industrial Average climbed 1.5% and the Standard & Poor’s 500 Index gained 1.7%.

The kiwi “may start to ease lower once it breaks its equity correlation” and stops following the trend in US stocks, said Borkin. Sentiment for the US dollar declined after a G-24 official said many countries were seeking an alternative reserve currency to the greenback.

US policy makers released the methods used in testing the nation’s 19 largest banks’ ability to weather the economic downturn. The Federal Reserve said the turmoil had “substantially reduced” reserves at the banks, though most have capital in excess of regulatory requirement.

The Fed is due to release the results of the so-called stress tests next week, and the largest banks may be forced to raise more capital to improve their balance sheets. US gross domestic product data out on April 29 in the US will probably show the world’s largest economy contracted 1.1% to 1.2% in the first quarter this year, according to economists.

The same day, the Federal Open Market Committee is expected to keep its benchmark interest rate steady in a range of zero to 0.25%. Traders will also be watching for any new developments in quantitative easing.

The Bank of Japan is also likely to keep rates on hold, at 0.1%, and will release its outlook for economic activity and prices, which is expected to show a deteriorating situation in Japan’s economy.

The kiwi was little changed at 54.87 yen from 54.86 yen on Friday in New York.

On the radar this week is the National Bank survey of business confidence, overseas trade figures, and building consents all of which are due before Bollard releases his latest decision on the OCR.

Businesswire.co.nz

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