Dollar outlook: Kiwi buoyed by global optimism, may rise

Monday 11th May 2009

The New Zealand dollar may rise this week as confidence grows that the global economic slump has bottomed, stoking enthusiasm for high-yielding, or riskier assets.

Five of eight strategists and economists predict the currency will hold above 60 U.S. cents this week, a five-month high, with three of those predicting it will add to its gains, according to a BusinessWire survey.

The other three said it was likely to trend lower this week.Helping buoy risk appetite were figures showing the US economy shed less-than-expected jobs, while the results of the bank stress tests showed the 19 largest American lenders needed less capital than some investors had feared. The U.S. Dollar Index, which measures the greenback against the world’s major currencies, fell 1.7% on Friday.

“The US dollar index broke down on Friday,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. Ongoing weakness in the greenback is likely to keep the kiwi up,” he said. Kelleher was the only analyst to correctly call the kiwi higher in last week’s survey.

US non-farm payrolls fell by 539,000, according to the US Labor Department, less than the expected 590,000-600,000 predicted by economists as the jobless rate jumped up to 8.9%, the highest level since 1983.

The results of the so-called stress tests signaled 10 of the 19 banks examined would require around US$75 billion of extra capital, and boosted sentiment that the position of American banks was essentially sound.

The euro gained to US$1.3626 from US$1.3395 on Friday in New York and the US Dollar Index sank to a six-week low as optimistic sentiment encouraged investors to exit the relative safety of the greenback in favour of higher yielding currencies.

The Reserve Bank of New Zealand releases its Financial Stability report on Thursday, which is expected to emphasise the strength of the nation’s banking sector. Government figures today showed the total value of electronic card spending rose 0.7% in April.

The trend shows total transactions have been positive this year, while the increase in retail transactions suggests it has picked up in the last two months, the accompanying commentary said.

Signs of improvement in the local economy could help sustain optimism about the kiwi, said Darren Gibbs, chief economist at Deutsche Bank. He predicts the currency will trade between 59.25 US cents and 60.80 cents this week. If it breaks the top-side of his range, it has “room to move” before it reaches the next technical level, he said.

Investors will be watching Europe this week when first-quarter gross domestic product for the Eurozone and Germany is released on Thursday in Europe. Economists forecast the Eurozone economy shrank 2.1% and German GDP contracted 3% in the latest quarter. The kiwi increased to 44.46 euro cents from 44.31 cents last Friday in New York.

Danica Hampton, currency strategist at Bank of New Zealand, said the contraction in Europe would be much worse than those in the UK and the US, which were 1.5% and 1.6% respectively. Hampton is one of two analysts who predict the currency will fall this week, with economic indicators pointing to a decline below 60 US cents.

She said “the biggest concern is the rising costs of capital” that could threaten a recovery in the US While she doesn’t forecast a rally in the currency, she said if equity markets continue to gain, it could add support to the New Zealand dollar.

Senior currency strategist at RBC Capital Markets Sue Trinh was the other voice of dissent in the survey, and forecasts the currency will trade between 58.60 US cents and 61 cents this week as it pulls back below 60 cents. She expects the budget on May 28 to be the next major domestic driver in the kiwi, and until then, it will be at the whim of global forces.

The Australian government unveils its 2009 budget tomorrow, and an indication of a deteriorating economy could see the New Zealand currency fall lower, said Westpac Banking Corp. currency strategist Imre Speizer. The kiwi gained to 78.77 Australian cents from 78.59 on Friday in New York.

Australian Treasurer Wayne Swann told the Australian newspaper his efforts to deal with a A$200 million fall in tax revenue had been hampered by the previous administration’s extravagant spending. The Australian dollar rose to 76.84 US cents from 75.56 cents on Friday.

Investors will be watching for the NAB Business Confidence survey in Australia out later today, which could give an indication as to the state of the economy of New Zealand’s largest trading partner.

On the radar this week will be the release of April’s retail sales data on Friday, along with the latest Fonterra online auction for milk powder, which was delayed last week, on Wednesday. Fonterra Group Cooperative recently announced a 10 cent increase in its forecast payout to farmers to $5.20 a kilogram.

Businesswire.co.nz

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