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NZ Dollar Outlook: Kiwi held back by global fears

Tuesday 8th June 2010

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The New Zealand dollar will be at the mercy of investors’ dwindling appetite for risk, even as the Reserve Bank is poised to start hiking interest rates on Thursday, with strategists expecting a sombre week for the currency.  

All seven economists and strategists in a BusinessWire survey are neutral or undecided on where the kiwi will go this week, though three have a bias to the downside, and two to the upside.

The kiwi dollar slumped 3.3% over the long weekend after share markets in the U.S. and Europe tumbled amid heightened fears about Europe’s sovereign debt crisis and weaker than expected American labour data.  

“The market is panicking, and has been panicking for a while – it seems determined to carry on panicking with no rhyme nor reason,” said Derek Rankin, director at Rankin Treasury Advisory Ltd. “The kiwi’s broken down through some fairly key levels.” 

The kiwi dollar fell to 66.26 U.S. cents from 68.54 cents on Friday in New York, and Rankin has given it a negative bias this week, amid subdued appetite for higher yielding assets.  

This comes ahead of Thursday’s monetary policy statement by central bank Governor Alan Bollard, who is expected to hike the official cash rate 25 basis points to 2.75%, according to a Reuters survey.

Investors are betting Bollard raises rates 159 basis points over the next 12 months, according to the Overnight Index Swap curve.  

Bollard embarked on the developed world's steepest series of cuts to the benchmark interest rate in response to New Zealand’s worst recession in 18 years, and slashed the OCR to a record low 2.5%, where it’s remained since April last year.

Since then, New Zealand’s economy has bounced back faster than predicted, initially with a net inflow of new migrants and returning expatriates propping up the property market, then with surging dairy prices underpinning strong exports.  

Robin Clements, economist at UBS, expects Bollard will hike the OCR this week, and said that will probably be positive for the currency, though global risk appetite will be the dominant theme.

With an OCR increase damping interest rate differentials with Australia, Clements expects the kiwi will make stronger gains against its trans-Tasman counterpart than against the greenback, which is subject to international sentiment.

The kiwi was little changed at 81.05 Australian cents from 81.02 cents on Friday in New York.  

Clements also predicts the first quarter terms of trade, also out on Thursday, will help underpin support for the kiwi. The value of exports grew 6.8% in the three months through March, according to a Reuters survey, turning around a 0.3% contraction a quarter earlier.  

Still, the current levels are a turning point, according to Westpac Banking Corp. market strategist Imre Speizer, who says the kiwi has a 50-50 chance of bouncing back from its recent slump, or tumbling further to 62 US cents. The 65.50 cents level is “extremely critical” for its direction, and if it closes below that, it will extend its decline, he said.  

The kiwi dollar will probably be little changed on a trade-weighted basis, with weakness against the greenback likely to offset any gains on the other cross-rates, according to BusinessWire’s survey.  

The kiwi dropped to 65.40 on the TWI from 66.84 last week, and fell to 60.80 yen from 63.58 yen. It declined to 55.47 euro cents from 56.22 cents on Friday in New York, and decreased to 45.72 pence from 46.76 pence.  

Rankin said the fundamental strengths in New Zealand’s economy are being borne out in the cross-rates, but in the current environment, investors are flocking to so-called safe-havens such as the US dollar and yen.  

On the data radar this week, New Zealand’s first quarter building work put in place showed a pick-up in residential activity in the first three months this year, though manufacturing was very weak, while Finance Minister Bill English will appear before Parliament’s Finance and Expenditure Committee.

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