Dollar gains as retail sales jump, US earnings awaited

Tuesday 13th October 2009

The New Zealand dollar gained, with trading reduced by holidays in the US and Japan, after figures showed retail sales climbed more than expected and optimism grew that US corporate earnings will beat estimates.

Retail sales climbed 1.1% in August, according to Statistics New Zealand. That’s more than twice the pace forecast by economists and follows a 0.5% decline in July.

Stocks on Wall Street mostly gained yesterday, pushing the Standard & Poor’s 500 to its highest level in 12 months as investors prepare for the rush of third-quarter results this week from companies including Intel Corp., Johnson & Johnson, Bank of America, Goldman Sachs Group, JPMorgan Chase, Citigroup, Google and General Electric.

The earnings season as kicked off with an unexpected profit from aluminium producer Alcoa Inc. Adding to optimism, Federal Reserve chairman Ben Bernanke last week flagged the potential end of quantitative easing as demand for stimulus aid diminishes.

“We think the US dollar is chronically in decline,” said Derek Rankin, director of Rankin Treasury Advisory. “The trend for the New Zealand dollar is higher but it is already very firm and there’s a bit of nervousness about these corporate results and data.”

The kiwi dollar climbed to 73.62 US cents, from below 73 cents yesterday. The currency strengthened to 81.15 Australian cents from 80.64 cents and rose to 66.14 yen from 65.68 yen. It rose to 49.81 euro cents from 49.46 cents.

Rankin said traders picked up on Bernanke’s comments that a lot of the funding made available to the markets is “increasingly not being used” and that’s stoked optimism that “liquidity is coming right” in financial markets. Now investors want to see proof of the flow-through to the broader economy, increasing the focus on quarterly earnings.

Economists are debating the timing of tightening by the Reserve Bank of New Zealand against a backdrop of reviving economic growth, with the economy unexpectedly emerging from recession in the second quarter. Governor Alan Bollard is expecting a slow, fragile recovery and officially won’t raise interest rates until the second half of 2010.

The central bank is required to keep inflation within a 1%-to-3% target range and government figures this week are expected to confirm consumer prices remain benign.

The Consumer Price Index probably rose to 0.8% in the third quarter from 0.6% three months earlier, while the annual rate slowed to 1.1%, near the bottom of the central bank’s range.

“The world isn’t expecting inflation to present itself anywhere soon,” Rankin said.

Still, markets are betting Bollard will move sooner, following the lead of the Reserve Bank of Australia’s Glenn Stevens, who presides over a much stronger economy.

“Current market pricing is consistent with nearly a 25 basis points hike in January and about 175 basis points of tightening over the next 12 months,” said Danica Hampton, currency strategist at Bank of New Zealand.

Businesswire.co.nz

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