NZ Dollar Outlook: Kiwi faces tough week ahead of Bollard's MPS

Monday 7th December 2009

The New Zealand dollar faces a tough week ahead of the central bank's monetary policy statement on Thursday after falling U.S. unemployment unexpectedly stoked the prospect of an early rate hike by the Federal Reserve.

All seven economists and strategists in a BusinessWire survey predict the kiwi dollar will remain in its current range or push lower this week, after the greenback reported its biggest daily gain since January after U.S. unemployment shrank last month. Four predict the New Zealand dollar will trade in a range this week, while the other three expect the currency to fall. Three of the seven predict the currency will be capped at 73 U.S. cents.

The correlation between good economic news in the U.S. and a weaker greenback broke down on Friday after the currency surged on Labor Department figures showed the world’s largest economy only shed 11,000 jobs in November compared to the 125,000 job losses predicted. Higher-yielding, or riskier, assets declined as investors priced in rate hikes by the Fed next year. The New Zealand dollar dropped to 71.78 U.S. cents from 72.43 cents on Friday in New York, while the Australian dollar fell to 91.53 cents from 92.54 cents.

“With markets pricing in an increased chance of a rate hike, investors have switched their carry trade out of the U.S. dollar and into the yen,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. “In the carry trade universe, that helped support the kiwi” which didn’t get too sold off against the other major currencies, she said.

Trinh predicts the currency will trade between 71 U.S. cents and 72.50 cents this week as it prepares for the Reserve Bank of New Zealand to review the official cash rate on Thursday.

Governor Alan Bollard is expected to ignore his trans-Tasman counterpart’s tightening monetary policy and hold the line on his strategy to keep the OCR at a record-low 2.5% until the second half of 2010, according to a Reuters survey, though economists are divided over whether he will keep the same wording.

Imre Speizer, market strategist at Westpac Banking Corp., said Bollard wants to “avoid alerting people about piling in to fix their mortgage rates” though the figures in the statement will have to reflect the improvement in the country’s economy.

Speizer is bearish on the kiwi this week and expects it will test, and may break, support levels at 70.80 U.S. cents.

The main data release in Australia that may have a bearing on the kiwi dollar will be Australian employment data on Thursday. The market consensus is that unemployment grew to 5.9% last month from 5.8% a month earlier, though any positive surprise may highlight the differences between the trans-Tasman economies.

Danica Hampton, currency strategist at Bank of New Zealand, expects dips below 78 Australian cents to be limited after sustained downward pressure on the cross, and she suspects the kiwi will push higher against the Australian dollar. The New Zealand dollar rose to 78.37 Australian cents from 78.20 cents on Friday in New York.

Six of seven economists surveyed predict the kiwi will remain in familiar ranges on a trade-weighted basis, with one forecasting it to decline.

The currency edged higher to 64.32 on the trade-weighted index, or TWI, a measure of the kiwi against the Australian dollar, yen, pound, euro and greenback, from 64.27 on Friday in New York, and pushed up to 64.62 yen from 63.79 yen.

On the data radar this week is manufacturing, terms of trade and construction data that will give economists an indication of how New Zealand’s economy performed in the September quarter, while November’s electronic card transactions come out on Wednesday.

Offshore, Fed chairman Ben Bernanke will give a speech to the Economic Club of Washington tomorrow morning New Zealand-time, while central banks in England and Canada will give an update on their outlook when they respectively review monetary policy. U.S. data includes retail sales, continuing unemployment claims and the University of Michigan confidence survey.

Businesswire.co.nz

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