Dollar outlook: Kiwi may sink ahead of RBNZ review

Monday 8th June 2009

The New Zealand dollar, which has tumbled against a resurgent greenback, may extend its slide this week as investors gauge the potential for a further interest rate cut and jawboning by central bank Governor Alan Bollard to drive the kiwi lower.

Six of seven strategists and economists in a BusinessWire survey predict the kiwi dollar will extend its losses as signs that the US recession is abating help stoke demand for the US dollar. The seventh in the survey expects the currency to hold around its current level.

Bollard will cut rates by 25 basis points according to a Reuters survey, amid concern that stubbornly high long-term borrowing costs and a stronger kiwi dollar are slowing back the nation’s economic recovery. Fonterra Cooperative Group, the world’s largest dairy exporter, cut its forecast payout for the 2010 season by 12.5% to $4.55 per kilogram of milk solids last week, blaming the high kiwi dollar.

“Bollard will try to jawbone the currency lower,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “The TWI is still quite high and will be a concern” for his desired export-led recovery, he said.

The trade-weighted index, or TWI, which measures the kiwi dollar against the currencies of major trading partners, was last at 59.80, from 59.98 on Friday and has climbed from 51.06 cents on March 1. The central bank had forecast the TWI to average 52.60 for the first half of the year, according to its last Monetary Policy Statement in March.

The New Zealand dollar sank to 62.49 US cents today from 63.64 cents on Friday in New York. In April, Bollard said long-term rates were “out of line” with the bank’s expectations, a statement that sent the kiwi down about 1 US cent on the day.

Kelleher predicts the kiwi will trade between 60 US cents and 64 cents this week with a downside bias, as it tracks back to the bottom end of the range.

The central bank has slashed interest rates 575 basis points to a record low 2.5% after it embarked on the steepest series of cuts to the OCR since its inception a decade ago.

High long-term interest rates have added weight to calls for a further cut in the OCR, after Kiwibank lifted five-year mortgage rates to 7.95%, joining TSB and Bank of New Zealand in hiking longer-term fixed rates. Last week, ASB Bank became the first bank to increase its five-year rate back to 8%.

The US dollar’s return to favour among investors is one reason why the New Zealand dollar will probably fall this week, said Robin Clements, economist at UBS New Zealand. Data flows are probably going to show a weaker economic climate and the central bank’s outlook will likely be pessimistic, he said.

Better-than-expected employment data in the US stoked investor appetite for the world’s reserve currency as non-farm payrolls shrank by 345,000 last month, less than the 520,000 decline forecast in a Reuters survey.

The Dollar Index, a measure of the US dollar versus a basket of six currencies, climbed to 80.67 on Friday in New York from 79.47 the previous day.

Stronger yields for US Treasuries underpinned support for the greenback amid speculation the Federal Reserve may lift interest rates from its near-zero target as early as December.

“The bond market rose quite significantly in the past week,” said Philip Borkin, economist at ANZ National Bank. He expects the kiwi will extend its slide this week, and could fall below 60 US cents.

The yield on 10-year Treasury notes advanced 12 basis points to 3.83% on Friday while the two-year note climbed to a yield of 1.23% from 0.96%. The gap between the yields widened to as much as a record 281 basis points. The spread, or yield premium offered by New Zealand 10-year government bonds over comparable Treasury notes has narrowed to 219 basis points from as much as 260 points at the start of the year.

Darren Gibbs, chief economist at Deutsche Bank, was the lone dissenter on the kiwi’s outlook this week, predicting the New Zealand currency will trade in a range of 61.20 US cents to 64 cents.

He expects the kiwi will come under pressure early in the week, but if global economic conditions improve, there are prospects that risk appetite would grow, helping support the New Zealand dollar.

The TWI will probably decline this week, according to six of seven strategists and economists surveyed by BusinessWire. The seventh said it would probably remain in its current range.

The New Zealand dollar faces more than $4 billion of maturities in eurokiwi and uridashi bonds next month, and this could drag down the kiwi-yen cross.

With the bond maturities looming “the kiwi might be sold off before it hits,” said Clements. It will impact on the “yen cross in particular.”

The kiwi gained to 61.94 yen from 61.59 yen on Friday in New York. Australian unemployment figures out on Thursday could weigh on the kiwi dollar after last month’s decline to 5.4% surprised investors.

The kiwi slipped to 78.74 Australian cents today from 79.17 cents on Friday in New York. The currency fell to 44.92 euro cents from 44.91 cents on Friday in New York.

Data on the radar this week includes volume of building work put in place, due tomorrow, terms of trade and electronic card spending on Wednesday, and retail sales on Friday. Investors are also awaiting the Fed’s beige book on Thursday, providing the latest central bank snapshot of the US economy.

Businesswire.co.nz

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