NZ Dollar Outlook: Kiwi to remain range-bound while EU mulls Greece rescue

Monday 1st March 2010

The New Zealand dollar will likely stay in its recent range of between 68 US cents and 71.50 cents as the European Union mulls what to do about Greece.

Four of six economists and strategists in a BusinessWire survey predict the currency will meet resistance at 68.50 US cents this week as it follows any gains in the euro amid the ongoing talks over Greece’s sovereign debt problems. The other two predict it may go as low as 68 cents. Two economists have capped the kiwi at 71.50 cents this week, with the rest seeing headwinds around 70.50 cents.

European markets will probably direct traffic this week after rumours of a bailout package for debt-stricken Greece boosted stock markets, even though they were quashed by German chancellor Angela Merkel. Greece has until March 16 to satisfy its fellows in the European Union that it is doing enough to slash its budget deficit, and French Finance Minister Christine Lagarde told Europe 1 radio that the Mediterranean nation won’t be left to fall apart provided it meets its commitments.

“At the moment it’s all rumours and hearsay that the market’s trading on,” said Khoon Goh, senior markets economist at ANZ National Bank. “The kiwi’s just going to trade within the broad ranges until we get some firm news.”

Goh predicts the currency will trade between 68.50 US cents and 70.50 cents this week. The kiwi rose to 69.92 cents from 69.40 cents on Friday in New York, and increased to 51.35 euro cents from 51.13 cents.

The major event for the kiwi this week will be tomorrow’s decision by the Reserve Bank of Australia on whether it will hike interest rates this month after pausing in February. The RBA was the G-20 central bank to embark on tighter monetary policy after the so-called ‘lucky country’ avoided falling into recession, and markets are split on whether Governor Glenn Stevens will move tomorrow.

The currency slipped to 77.80 Australian cents from 77.95 cents on Friday in New York.

Westpac Banking market strategist Imre Speizer said a pause would probably have a greater impact on currency markets than a hike, even though investors are split on which way Stevens will go.

“A hike would be positive for the Australian dollar and slightly positive for the kiwi, but not a hugely big mover,” he said.

Speizer said he will continue with his short positioning in the kiwi, where investors sell on rallies in the expectation that they can buy at a cheaper price, though the very short positioning the euro could see a very quick correction.

Markets are pricing in 100 basis points of rate hikes in the coming 12 months by the RBA, according to the Overnight Index Swap curve.

That’s compared to the 149 bps predict for New Zealand’s official cash rate, the lowest level this year. Reserve Bank of New Zealand Governor Alan Bollard will make a quarterly monetary policy statement next week, and with the recent bout of soft data this year, he’s expected to stick to his guns and lay off boosting rates until the middle of the year.

Commonwealth Bank of Australia economist Chris Tennent-Brown said Bollard doesn’t have to signal higher rates until the meeting before his actual move, and with that likely to come in June or July, he says the Governor won’t have to give too much away. He picks the kiwi will trade between 68.50 US cents and 70.50/71 cents this week as markets wait for the trans-Tasman central bank meetings.

The kiwi will face a mixed bag on the trade-weighted index this week, with it likely to trend down against its Australian counterpart if the RBA decides to hike. Still, the problems with Greece and the UK are likely to underpin ongoing gains against the euro and the pound.

The kiwi rose to 46.06 pence from 45.43 pence on Friday in New York, and gained to 62.20 yen from 61.97 yen on Friday in New York. On the trade-weighted index, or TWI, a measure of the currency against a basket of the greenback, Australian dollar, yen, euro and pound, it rose to 64.71 from 64.42 last week.

On the data radar this week is Fonterra’s online auction for milk powder on Tuesday in the US, and Australian fourth-quarter GDP on Wednesday. US non-farm payrolls data is out on Friday, while the European Central Bank and Bank of England will review their monetary policy settings on Thursday.

Businesswire.co.nz

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