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NZ Dollar Outlook: Kiwi to have run at 80 US cents

Monday 8th November 2010

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The New Zealand dollar will try to break above 80 US cents this week after the Federal Reserve said it will start printing US$600 billion to revive a stalled U.S. economy.  

Five of seven economists and strategists surveyed by BusinessDesk expect the kiwi will try to break above 80 US cents for the first time since April 2008 after the Fed embarked on a second round of asset purchases, effectively devaluing the greenback. Analysts were split on whether the currency will break through the barrier, with two picking the NZ dollar to gain on the week, three predicting no change, and two giving it a downside bias.

Prime Minister John Key, a former currency trader told TV One’s Breakfast programme he thinks the kiwi will “probably go a little bit higher” than 80 US cents, which becomes “problematic” for manufacturers who aren’t benefiting from rising commodity prices. The kiwi fell to 79.11 cents from 79.25 cents on Friday in New York after rising as high as 79.70 cents.

“The New Zealand dollar has had a very quick move up, but it’s not at all surprising – the first time the Fed did QE (quantitative easing), the New Zealand dollar shot up from 50 US cents to 75 cents,” said Derek Rankin, director at Rankin Treasury Advisory Ltd. “There’s a realignment of global fundamental interests, and the US wants to export more and import less” so its currency needs to be weaker, he said.

Rankin predicts the kiwi will consolidate on last week’s gains against the greenback this week, though it’s still on target to try to break its post-float high of 82.16 US cents.

Key talked down intervention, saying it was “very expensive” and hadn’t worked in the past. The last time Reserve Bank Governor Alan Bollard intervened in currency markets, the trade-weighted index was above 70, a level it touched on Friday during the New York session. The currency is sitting at 69.50 on the TWI from 69.37 last week and five of seven analysts surveyed predict it will gain this week.

Khoon Goh, head of market economics and strategy at ANZ New Zealand, said the strength of the kiwi will probably cause some “jaw-boning” this week as central bank officials try to convince investors to eschew their kiwi dollar holdings. Bollard will have a couple of opportunities this week when he fronts up to media and the Parliament, to take questions on the Reserve Bank’s quarterly financial stability report.

Goh predicts the kiwi remains at risk from fears about Irish sovereign debt and its potential contagion to Spain and Portugal, two of the other so-called PIGS nations, could see investors change their positions in the greenback. The kiwi rose to 56.34 euro cents from 55.86 cents on Friday in New York, and was little changed at 48.89 pence from 48.85 pence after touching a 31-year-high last week.

Leaders of the Group of 20 nations meet in Seoul on Thursday, and will likely continue discussions on the so-called ‘currency wars’, where nations compete to devalue their currency in a bid to stoke exports and improve their terms of trade. Chinese and German officials are expected to continue their criticism of American policies that are keeping the greenback weak.

The major local event this week will be Australia’s employment data on Thursday, which analysts predict will show unemployment dropped 0.1 percentage point to 5% last month.

Imre Speizer, markets strategist at Westpac, said the kiwi has more upside against its Australian counterpart as interest rate markets start looking beyond immediate monetary policy settings and to when the Reserve Bank of New Zealand resumes tightening.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said an uridashi issue worth some $800 million this week will probably help underpin support for the kiwi, though he sees the biggest risk coming from Europe’s debt issues.

The kiwi gained to 64.26 yen from 64.03 yen on Friday in New York, and Mike Jones, strategist at Bank of New Zealand, predicts there’s more room for gains as the carry trade starts to rear its head again.

On the data radar this week is some local housing data on Friday which is expected to show a dearth of buyers in the market, and consumer spending on electronic cards tomorrow. Offshore, Chinese officials release inflation, retail sales and manufacturing data on Thursday.

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