Dollar outlook: Kiwi faces headwinds as double-dip prospects talked up

Monday 5th July 2010

The New Zealand dollar will probably push lower this week amid growing speculation there are prospects for a double-dip recession after weak American labour data.

Five of six economists and strategists in a BusinessDesk survey are downbeat on the kiwi this week after US non-farm payrolls fell short of expectations and raised the prospect of a slower economic recovery in the US. One predicts the kiwi will trade in a range this week.

The kiwi dollar fell to 68.52 US cents from 69.44 cents on Friday in New York after the US private sector only added 83,000 jobs last month, while the economy shed 125,000 overall. The unemployment rate eased back to 9.5% as 600,000 people gave up looking for work.

“Last week ongoing concerns gathered momentum over the question of slower global growth,” said Mike Symonds, head of sales and foreign exchange at Bank of New Zealand. “Global growth forecasts are weaker and growth-sensitive currencies have borne the brunt of that – the kiwi fell sharply in the middle of last week and hasn’t recovered.”

Symonds expects the kiwi dollar will face a mixed bag this week, trading between 67.50 US cents and 70 cents as investors shy away from the greenback in favour of the euro, as well as so-called risk-sensitive currencies such as the Australian and New Zealand dollars.

Heightened fears about the health of the US economy have encouraged investors to restore their exposure to Europe, and pare back short positions in the euro, where traders sell the currency in the expectation of being able to buy it back at a cheaper price.

Derek Rankin, director at Rankin Treasury Advisory, said the kiwi is torn between selling pressure in share markets pushing it down versus a stronger euro lifting it up.

The kiwi sank to 54.60 euro cents from 55.47 cents last week, and dropped to 45.11 pence from 45.70 pence. He predicts it will trade between 68 US cents and 72 cents as this tension keeps it bound within a range.

The New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion is expected to show business confidence was stable in the second quarter, even as Europe’s sovereign debt crisis weighed on financial markets. The National Bank Business Outlook, which has a close correlation to the NZIER survey, eased in May and June as firms pared back their optimism amid the debt concerns in Europe.

The QSBO encompasses the first interest rate hike by the Reserve Bank in three years, and the May budget that introduced a cut to the corporate tax rate.

Robin Clements, economist at UBS New Zealand, said the QSBO was always an important piece of data, and will likely show an improvement in confidence for the March quarter. Still, the global fears for a double-dip recession will likely overshadow any upbeat reading, and he expects the currency to remain under pressure this week.

The Reserve Bank of Australia reviews its target cash rate tomorrow, and is expected to keep the benchmark interest rate on hold at 4.5%. Investors will be looking to see whether the RBA commentary focuses on the global concerns or its domestic economy.

Australia’s central bank was the first G-20 nation to embark on tighter monetary policy last year, after the country avoided falling into recession and kept its labour market in check. The kiwi dollar fell to 81.60 Australian cents from 81.91 cents.

Other central banks meeting this week include Indonesia, Malaysia, Korea, Europe and the UK, with the Malaysian regulator the only one expected to hike rates.

Fonterra Cooperative Group’s online dairy auction is held on Tuesday in the US, and may put some pressure on the kiwi with Northern Hemisphere production near full-swing. The average price of whole milk powder fell 3.4% to US$3,790 a tonne last month as buyers were reluctant to secure long-term contracts.

All six strategists predict the kiwi will fall on a trade-weighted basis, with a stronger euro, pound and yen underpinning a decline on the TWI. The kiwi dropped to 60.12 yen from 60.98 yen on Friday in New York.

Independence Day holiday in the US will keep markets thin at the start of the week, and with little on the data radar (only ISM services data in the US) sentiment will continue to be the major driver.

Businesswire.co.nz

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