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Dollar outlook: Downbeat Kiwi may drop below US70c

Monday 16th August 2010

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The New Zealand dollar may drop below 70 US cents this week as investors continue to eschew riskier, higher-yielding assets as a more pessimistic outlook on the US economic recovery gains ground.  

All seven economists and strategists in a BusinessDesk survey were downbeat on the kiwi this week, with five predicting a dip below 70 US cents as investors stay gloomy about the strength of the global recovery. 

The kiwi sank to 70.22 US cents from 71.09 cents on Friday in New York and fell to 55.18 euro cents from 55.43 cents after lacklustre demand for an Italian auction of government bonds sparked concerns about the state of Europe's sovereign debt ahead of this week's Irish debt auction.

Compounding the downbeat tone on Friday was weaker-than-expected growth in American consumer spending last month, and the Standard & Poor's 500 index fell 0.4% on Friday.

"The kiwi was the second-worst performer last week - it's had its time above 70 US cents, and now it's time for sub-70 action," said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

"It should be a reasonably quietish week with US sentiment the key."  

Kelleher expects the kiwi will look to push towards 68.50/69 US cents once it breaks through the 70.50 cents barrier.  

Derek Rankin, director at Rankin Treasury Advisory, said New Zealand's data had been running softly in recent weeks, though that hadn't been enough to deter the currency from gaining.

With little on the horizon this week, he says the kiwi will drift lower as it follows offshore sentiment.  

"The New Zealand dollar is being driven by international pressures as always," Rankin said.

"Things are volatile and things moving the currency are lasting for days rather than weeks or months."  

Rankin predicts the kiwi will trade between 70 US cents and 72/73 cents this week.  

The ANZ Roy Morgan consumer confidence survey on Thursday will probably show New Zealanders are still reluctant to ramp up their spending, while migration data on Friday is expected to show a net loss of locals jumping across the Tasman.  

The kiwi dropped below 79 Australian cents for the first time since May 5 as markets keep paring back their outlook on the Reserve Bank of New Zealand's tightening track for interest rates.

Investors are betting the central bank will lift the official cash rate 57 basis points in the coming year, according to the Overnight Index Swap curve, as a stream of weaker data gives Governor Alan Bollard room to keep stimulatory conditions in place for longer.  

The Reserve Bank of Australia releases the minutes from its last meeting tomorrow, and Governor Glenn Stevens is due to give a speech tomorrow entitled ‘The Role of Finance', ahead of Saturday's Federal election.  

Robin Clements, economist at UBS New Zealand, said although markets dislike uncertainty, the worst the election can offer is a hung Parliament, with the fiscal policies of the major parties reasonably close.

The kiwi recently traded at 79.03 Australian cents from 71.09 cents on Friday in New York.  

All seven surveyed strategists expect the kiwi to decline on a trade-weighted basis, with most cross-rates looking heavy in a risk averse environment. The currency recently traded at 65.92 on the trade-weighted index from 66.41 on Friday in New York, and dropped 45.16 pence from 45.54 pence.  

Last week, Japanese policy makers urged Prime Minister Naoto Kan to consider intervening in the yen, which has surged on the current bout of risk aversion.

Kan may meet with Bank of Japan Governor Masaaki Shirakawa this week to discuss measures to address the yen's strength.

The kiwi dropped to a four-week low  of 60.44 yen from 60.86 yen on Friday in New York.  

On the data radar this week is a slew of US housing data, along with the Philadelphia Federal Reserve's confidence survey.

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