Currency Focus: CBA's Grace tips kiwi to hit 70 US cents as greenback slides

Friday 3rd July 2009

The New Zealand dollar may climb back up to 70 US cents, a level not seen since August, on demand for the nation's exports and as the prospect of soaring US fiscal deficits weighs on the greenback.

Commonwealth Bank of Australia chief currency strategist Richard Grace says the kiwi dollar may reach 70 US cents this year and kick on to 75 cents by June 2010. The local currency was recently at 63 cents.

Grace told a business audience in Wellington that he is bearish on the US dollar, predicting it will sink to $1.47 per euro and 89 US cents against the Australian dollar.

New Zealand's "export value has shown no visible weakness," despite concerns about the strong kiwi, and this has helped maintain the relative strength of the economy, Grace said.

His bullish forecast puts Grace at odds with Reserve Bank Governor Alan Bollard, who last month warned against bets on an appreciating kiwi, which was curbing the economy's ability to "rebalance" away from consumer spending to export and investment-led economic growth.

"If markets are buying the New Zealand dollar on the expectation of a strong recovery they may end up being disappointed," Bollard said.

The RBNZ predicts the trade-weighted index of the New Zealand dollar, which measures the currency against the greenback, Australian dollar, yen, euro and pound, will sink to 54.70 in the first half of 2010, from about 60.77 currently.

The central bank is betting a weaker New Zealand dollar will help stoke demand for the nation's exports and lift the economy out of its worst recession in 30 years. Still, a resurgent kiwi may curb the potential for exports to revive the economy, according to the New Zealand Institute of Economic Research.

The research firm last month said a higher kiwi could "derail consensus forecast of an export-led recovery." Figures released this week showed that New Zealand posted its fourth straight monthly trade surplus in May as the volume of exports to China increased. International sales rose 5.8%, with shipments to the world's fourth-largest economy accounting for about 80% of the gain.

The surplus widened to $858 million in May, from $276 million in April, according to government data. With export volumes remaining strong, the resilient currency is more of a "headwind" than a drag on offshore demand, and other factors, such as the breaking of drought conditions, had assisted the agricultural sector this year, CBA's Grace said.

Agricultural production in New Zealand has rebounded from a slump a year ago, when drought forced farmers to run down their herds and flocks. Total milk powder exports jumped 104% in May from the same month of 2008, according to Statistics New Zealand figures this week.

"Demand outweighs price, and the currency doesn't make as much of an impact" on exports, he said. The kiwi dollar has climbed from below 50 US cents in March, when it rounded out a 12-month slide of almost 40% from a record of about 82 cents in the same month of 2008.

The New Zealand dollar plumbed depths of below 40 cents in late 2000, when the US economy was rallying on access to easy credit and surging asset values. In the past 12 months, the world's biggest economy has slumped into its deepest recession since WWII, with the collapse of the finance sector and bailout of banks and automakers lifting the country's fiscal deficit to a forecast US$1.75 trillion, or 13% of gross domestic product.

The Chicago Board Options Exchange's volatility index, or VIX, which shows expectations of volatility on the Standard & Poor's 500 and is sometimes referred to as the "investor fear gauge" has tumbled about 65% since it peaked in November in the wake of the Lehman Brothers collapse and fears other major banks would follow suit.

The VIX was at 27.95 recently, from 80.86 on Nov. 20. Grace expects the greenback will come under pressure from the revived risk appetite among investors, who will likely divest their holdings in US dollars in favour of higher-yielding assets in other currencies.

Danica Hampton, currency strategist at Bank of New Zealand, said the greenback is probably heading for a period of sustained weakness, keeping the kiwi dollar high, which will be bad for New Zealand's economy.

"Broad US dollar weakness is a theme providing support for the kiwi," she said. "In an ideal world, we'd be closer to 50 US cents" than remaining above 60 cents, she said.

"I don't think there are any fundamentals that could push it higher" than 65 cents, and it would take the "world to fall apart" for it to fall below 60 cents, she said

Businesswire.co.nz

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