NZ Dollar Outlook Kiwi may gain on Greek hopes, yield appeal

Monday 26th November 2012

The New Zealand dollar may rise from a month-high this week on hopes of progress on Greek financial aid, America's fiscal cliff and speculation the kiwi may once again become a favourite for the carry trade.

The New Zealand dollar recently traded at 82.37 US cents, having rallied in US trading on Friday from the 81.63 cents level it reached in Wellington at the end of last week. It is expected to trade in a range of 80.50 US cents to 83.50 cents, based on a BusinessDesk survey of six strategists. Five of the six see the kiwi rising on the week and one sees it unchanged.

Euro-area finance ministers return to Brussels tonight to try to forge agreement on the next instalment of financial aid to Greece, after inconclusive talks last week. Meantime in the US, officials from the White House and Congress will resume negotiations this week on an agreement to prevent automatic tax increases and spending cuts worth about US$607 billion kicking in on Jan. 1. US President Barack Obama said this month he was "confident" a new US budget deal would be reached.

"The kiwi has a firming bias," said Imre Speizer, senior markets strategist at Westpac Banking Corp. "US fiscal negotiations are tending towards some outcome and the Greek thing will edge towards an outcome. Those two will keep markets supported."

Signals out of Europe have been mixed. EU leaders failed to reach agreement at a special summit on the 2014-2020 EU budget, worth about 1 trillion euros, and European Council President Herman Van Rompuy said they would try to reach a compromise early next year, according to Reuters. Meanwhile, the Ifo institute's business climate index for Germany unexpectedly rose, climbing to 101.4 in November from 100 in October, the first increase in eight months.

The kiwi traded recently at 63.51 euro cents, down from as high as 66.80 cents in early August.

"We're reliant on political decisions for the direction of markets, and that's never a good thing," said Derek Rankin, director of Rankin Treasury Advisory.

That includes Japan's looming elections on Dec. 16, where the opposition LDP is expected to take power and has vowed to weaken the yen and "if necessary take interest rates negative," Rankin said.

The kiwi dollar last traded at 68 yen, the highest since late March. A change to a Japanese government more aggressively targeting the yen "will encourage the carry trade again," which will help underpin the kiwi dollar, he said.

New Zealand 10-year bonds are currently yielding about 3.53 percent while Japanese bonds of comparable maturity yield just 0.745 percent.

Tim Kelleher, head of institutional FX sales at ASB Institutional, said the kiwi's direction this week is dependent on offshore moves though one local positive is the allotment of units in the Fonterra Shareholders' Fund, which begin trading on Friday at noon.

Any offshore investors would need to buy kiwi dollars to pay for their units though talk is that the sale "has been scaled dramatically."

Investors will also be watching the Reserve Bank's survey of expectations, due tomorrow, for any clues to the central bank's thinking ahead of the Dec. 6 monetary policy statement. They'll get another clue to inflation expectations with the release of the NBNZ Business Outlook on Thursday.

"Despite a lower near-term inflation profile, the RBNZ's outlook is still likely to entail rising inflationary pressures over the medium-term horizon, UBS economist Robin Clements said in his weekly note on Friday. "In short, the RBNZ projections will still make the case for policy to 'gradually remove monetary stimulus' i.e. next move expected to be a hike, just not anytime soon."

Across the Tasman, capex for the third quarter and spending intentions will be closely watched for any signs that the life is draining out of the resources sector.

"Normally it is not too important but people are saying they might have to downgrade their capex forecasts," Westpac's Speizer said. "If it takes a dive you will see heavy Australian dollar selling and kiwi selling on the back of it."

The week rounds out with China's official PMI for October, which is expected to follow the unofficial HSBC flash PMI in showing manufacturing in that nation is expanding. UBS is forecasting the PMI will rise to 51.2 from 50.2.

BusinessDesk.co.nz

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