Dollar outlook: Kiwi may fall as recovery concerns sap risk appetite

Monday 13th July 2009

The New Zealand dollar may fall this week as concerns the global economic recovery might not be as fast as expected sap investors’ appetite for higher-yielding, or riskier, assets.

Five of seven economists and strategists surveyed by BusinessWire predict the kiwi will fall this week with offshore data eroding hopes the world economy will snap its slump soon. One economist expects the currency will gain on an equity rally this week, while the last forecasts it will continue to trade in its current range.

Investors may continue their flight to safety this week as markets lock in a pessimistic outlook on US corporate earnings. Among companies on the Standard & Poor’s 500, profits shrank by an average 35% in the second quarter and are heading for a 21% slide in the third, according to Bloomberg.

The New York and Philadelphia Federal Reserve Banks put out their respective consumer sentiment surveys later this week, which may show further declines in confidence.

“The kiwi was shown to be under pressure last week, and this is set to continue with increased global risk aversion,” said Khoon Goh, senior markets economist at ANZ National Bank.

“In a pressure environment, the two currencies that benefit are the US dollar and the yen” and the weakness expected in this week’s data flows should continue to weigh on the kiwi, he said.

The New Zealand dollar gained to 62.80 US cents from 62.50 cents in New York on Friday after better-than-expected consumer spending in May, with core retail sales up 1.6% from the previous month, according to Statistics New Zealand. Including auto sales, the dataset rose 0.8% month-on-month. The kiwi was little changed at 58.05 yen from 57.90 yen on Friday in New York.

Inflation fears will probably be taken off the table this week when Statistics New Zealand releases the consumer price index for the second quarter on Thursday. Economists predict the CPI fell back within the middle of the central bank’s 1-3% target band, adding to expectations interest rates can remain low.

Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney, said New Zealand’s central bank will be wary of cutting rates further as it doesn’t want to stoke the housing market in the current economic environment.

The property market has shown signs of stabilising in recent data releases from QV Valuations and the Real Estate Institute, and Governor Alan Bollard has already voiced concerns about a return to the “borrow and spend” mentality of the nation’s recent housing market boom.

Trinh predicts the kiwi will trade between 61.90 US cents and 63.80 cents with a bias to the top of the range this week, as the upcoming US bank earnings show potential of exceeding expectations.

Banc of America Securities-Merrill Lynch analysts predict a strong second-quarter profit from investment bank Goldman Sachs as commercial banks in the US reported record trading revenue in the first three months of the year due to wide trading margins and gains from interest rate products.

More favourable earnings from the US should stoke investors’ appetite for higher-yields, and could see the kiwi gain this week, said Imre Speizer, currency strategist at Westpac Banking Corp. He was the only strategist to predict a gain in the currency this week.

Speizer predicts the kiwi might go as high as 64 US cents this week, but still expects it to fall below 60 cents in the coming months.

John Horner, currency strategist at Deutsche Bank in Sydney, expects the kiwi to come under pressure in the next few weeks as the global economic outlook dims, and said may fall to around 58.50 US cents.

On the trade-weighted index, a measure of the currency versus a basket of five major trading partners, he doubts the currency will fall as far, with weakness in the Australian dollar likely to prop up the TWI.

“The Aussie dollar remains a lot more exposed to Chinese players” than the kiwi, he said, using the currency’s colloquial name.

The kiwi is little changed at 80.48 Australian cents from 80.50 cents on Friday in New York, and recently traded at 44.97 euro cents from 44.99 cents on Friday. It gained to 59.51 on the TWI from 59.36 in New York last week.

The kiwi dollar will probably fall on the TWI, according to five of seven economists and strategists in a BusinessWire survey. One predicted it will gain, while the last expects it to remain in the current range.

On the data radar this week is inflation from the US, Europe and China, American and Chinese retail sales, and US corporate earnings throughout the week. The Federal Reserve will also release the FOMC minutes on Wednesday in the US.

Businesswire.co.nz

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