Dollar outlook: Kiwi to stall at 75 US cents as all eyes watch Bollard

Monday 19th October 2009

The New Zealand dollar may be capped at 75 US cents this week after it failed to break through the level twice last week on higher than expected inflation, as investors wait for the central bank to review interest rates next week.

All six strategists and economists in a BusinessWire survey doubt the kiwi will hit a new high this week, even though the outlook looks grim for the greenback.

Three predict the currency will grind higher, two expect it to decline and one forecasts it to trade in a range. Stocks in Europe and the US eased on Friday after General Electric Co., America's largest corporate, and Bank of America posted disappointing results, raising doubts the economic recovery is as strong as earlier anticipated.

The Dow Jones Industrial Average fell back below 10,000 after it climbed over the key level for the first time in a year earlier in the week. With very little local data this week, the kiwi is at the whim of investors' sentiment towards the greenback until Reserve Bank Governor Alan Bollard reviews the official cash rate on Thursday week.

"With nothing on the horizon until the RBNZ reviews rates on the 29^th of October the kiwi will be driven by what happens offshore," said Khoon Goh, senior markets strategist at ANZ National Bank.

"75 cents is a key psychological level, and for the New Zealand dollar to break it, it would require either a further round of capitulation in the US dollar or a surprisingly hawkish comment from the RBNZ."

Goh predicts the currency will remain range-bound between 72.50 US cents and 75 cents this week. The kiwi fell to 73.78 cents from 74.37 cents on Friday in New York.

Underpinning some support for the kiwi dollar is the prospect Bollard will hike rates earlier than previously expected. Since April, when he slashed the OCR to a record low 2.5%, Bollard has reiterated rates would remain "at or below the current level" until the latter part of next year.

After the Australian central bank boosted its target cash rate 25 basis points this month, the market has priced in rate hikes in New Zealand as early as January.

The market is also predicting a 50 point hike by the Reserve Bank of Australia next month, although an article by RBA watcher Alan Mitchell is talking down the likelihood of this taking place, and Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney, expects the central bank's minutes will show the recent hike "was not as clear-cut as the market believes."

Trinh predicts the kiwi will push higher this week on the back of "remarkably resilient" risk appetite. Today's Bank of New Zealand-Business NZ performance of services index hit a 20-month high in another sign the local economy is reviving faster than Bollard anticipates. She predicts the currency will trade between 73.20 US cents and 75 cents this week.

Interest rate swaps should give a good indication as to how much support there is for the kiwi dollar this week, with two-year and three-year swap rates climbing last week, according to Imre Speizer, markets strategist at Westpac Banking Corp.

Speizer predicts the kiwi will ease against the greenback this week, with a range of 73 US cents to 75 cents.

One of the few highlights of the week will be RBA Assistant Governor Philip Lowe's speech this afternoon. Still, he isn't expected to shed much new information after Governor Glenn Stevens' last week laid bare the central bank's view on where Australia's fortunes lie.

The kiwi gained to 80.84 Australian cents from 80.75 cents on Friday in New York. Chinese data, including third quarter gross domestic product, retail sales, inflation and manufacturing numbers, will give the Australian dollar its lead after Stevens tethered Australia's fair weather to Chinese economic growth.

The world's fourth largest economy is expected to have grown an annual 9% in the period, according to Mike Jones, strategist at Bank of New Zealand.

Jones said the economic fundamentals still supported the kiwi, although he expects the currency will be capped at 75 US cents this week. Four of six economists surveyed predict the currency will remain in a range on a trade-weighted basis, with two others predicting it will push higher.

The kiwi fell to 66.34 on the trade-weighted index, a measure of the currency against the greenback, yen, euro, pound and Australian dollar, from 66.70 on Friday in New York. The pound has had a strong turnaround after Bank of England officials last week said the quantitative easing programme had worked, raising the prospect the UK's central bank may stop printing money. The bank's minutes will be released later this week.

The kiwi dropped to 45.25 pence from 45.48 pence on Friday in New York. Speizer tipped the kiwi to push higher against the yen this week as Japan's economy remained "comatose" and not joining in the global recovery. He expects the kiwi will trade between 66.50 yen and 70 yen this week.

The kiwi fell to 67.11 yen from 67.83 yen on Friday in New York, and dropped to 49.72 euro cents from 49.93 cents. On the radar this week, US Federal Reserve chairman Ben Bernanke will give three speeches this week, and the markets will continue to watch the central bank's response to the recovery. Equity markets in the US will continue to follow earnings season, with about 135 companies reporting on the Standard & Poor's 500 this week.

Businesswire.co.nz

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