NZ dollar falls as greenback buoyed on prospect of ECB stimulus

Monday 5th January 2015

The New Zealand dollar fell as investors rallied behind the greenback on heightened speculation the European Central Bank will ramp up its stimulus package to revive the region's moribund economy.

The kiwi fell to 76.32 US cents at 5pm in Wellington from 76.84 cents at 8am and 77.02 cents on Friday in New York. The trade-weighted index was 78.11 at 5pm in Wellington.

The US Dollar Index, a measure of the greenback against a basket of currencies, was recently at 91.449, having reached a nine-year high after ECB president Mario Draghi told German newspaper Handelsblatt he couldn't rule out deflation in the region, stoking expectations the central bank is likely to embark on a quantitative easing programme. Given the US Federal Reserve has stopped printing money and has indicated a path away from its zero interest rate policy, such a move by the ECB would increase the lure of the greenback where investors could derive bigger returns.

"Speculation the EU (European Union) is going to full-blown QE after Draghi's comments led to a resurgence in the US dollar," said Stuart Ive, senior dealer foreign exchange at OMF in Wellington. "The kiwi's been a bit of a whipping boy today, and that could be because of low liquidity."

German inflation figures will be watched by traders during the Northern Hemisphere session, and would probably spur more expectations for central bank action if they come in negative, OMF's Ive said.

Traders will also be focusing on Fonterra Cooperative Group's GlobalDairyTrade auction on Tuesday in the US to gauge whether milk prices have reached a bottom yet, and US employment figures on Friday in Washington.

A BusinessDesk survey of seven traders, strategists and brokers predicts the kiwi will probably trade between 75.50 US cents and 78.50 cents this week. Five thought the currency would fall, while one expected it to remain relatively unchanged and one bet it would rise.

The kiwi declined against the greenback through the latter half of last year as a stronger US economy raised expectations the Fed will start hiking interest rates this year, and that trend is expected to continue.

John Chisholm, a foreign exchange dealer at HiFX in Auckland, said some commentators are predicting the kiwi will continue its decline towards 70 US cents by the end of the year, dropping lower still the following year.

The kiwi dollar fell to 92.02 yen at 5pm in Wellington from 93.29 yen on Friday in New York, and declined to 94.61 Australian cents from 95.34 cents. It dropped to 63.88 euro cents from 64.30 cents last week, and increased to 49.91 British pence from 49.84 pence. It fell to 4.7480 Chinese yuan from 4.7788 yuan last week.

BusinessDesk.co.nz

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