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NZ Dollar Outlook: Kiwi likely to gain as returning investors keen on risk

Monday 11th January 2010

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The New Zealand dollar looks likely to gain as investors return from their Christmas and New Year holidays emboldened by the prospects for higher-yielding, riskier assets as the global economy continues its recovery this year.

All five economists and strategists in a BusinessWire survey predict the currency will gain this week after weak employment numbers in the U.S. eroded the likelihood of an early rate hike by the Federal Reserve and kept the greenback under pressure.

The world’s largest economy shed 85,000 jobs last month, more than the flat employment number expected, and renewed fears the Fed will keep interest rates at near-zero levels for the rest of this year.

The sell-off in U.S. interest rates encouraged investors to seek out higher yields elsewhere, such as in Australia and New Zealand, and the trans-Tasman currencies have benefited accordingly.

The Dollar Index, a measure of the U.S. dollar against a basket of six currencies, fell 0.5% to 77.45.  

“Risk appetite has remained pretty healthy and the kiwi dollar has squeezed up,” said Cameron Bagrie, chief economist at ANZ National Bank. The New Zealand currency “will be determined by sentiment overseas in equity markets and bond yields.”  

The kiwi rose to 73.91 U.S. cents from 73.08 cents on Friday in New York, and Bagrie said he wouldn’t be surprised if it pushed over 74 cents this week.  

The major local event for the kiwi dollar this week will be the release of the Quarterly Survey of Business Opinion by the NZ Institute of Economic Research tomorrow.

The survey is closely followed by the Reserve Bank, and climbed to a decade-high reading in the three months through September.  

Chris Tennant-Brown, economist at Commonwealth Bank of Australia, said they will be looking for ongoing improvements in businesses’ own activity, price and employment expectations.

“We’re at the bullish end of the scale in predicting the Reserve Bank will be hiking rates in the first part of the year” and he expects the kiwi dollar will remain strong this week. 

Ben Potter, research analyst at IG Markets in Melbourne, said the strong Chinese trade data out yesterday will underpin support for the Australian dollar, and this in turn will help the kiwi push higher this week.  

“This should be a fairly strong week for both (trans-Tasman) crosses as risk appetite remains better,” said Potter, who sees the kiwi well supported at its current level and could climb up to 74.50 U.S. cents this week.  

Three of five economists surveyed predict the kiwi will gain on a trade-weighted basis as U.S. dollar weakness boosts the series, with the other two indicating there may be some weakness for the New Zealand dollar on some crosses and it may remain little-changed.  

The kiwi climbed to 66.98 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.63 on Friday in New York, and advanced to 68.43 yen from 68.03 yen.  

Mike Jones, strategist at Bank of New Zealand, said the kiwi/yen cross looked vulnerable to a push higher. Investors have been returning to the Japanese currency to fund their carry trades, where they take out low interest loans in one country to invest in higher yielding assets in another.  

The European Central Bank will review its benchmark interest rate this week, and European industrial production will be another data set to watch.

The kiwi climbed to 51.28 euro cents from 50.98 cents last week, and increased to 46.04 pence from 45.62 pence.  

Australian employment data out on Thursday is expected to show the unemployment rate remained steady at 5.7% last month, and participation is predicted to nudge up to 65.3% from 65.2% in November, according to a Reuters survey.  

IG’s Potter said if the Australian data comes in better than expected, the kiwi will probably fall against its trans-Tasman counterpart.

The New Zealand dollar slipped to 79.59 Australian cents from 79.70 cents on Friday.  Also on the radar this week is the release of the U.S. Beige Book on Wednesday, which will give more indications as to how policy makers view the state of the world’s largest economy, along with U.S. retail sales and industrial production.

Locally, New Zealand building consents issued in November will be released on Thursday and electronic transactions data for December should confirm on Friday what kind of Christmas retailers have had.  

Fourth-quarter earnings season kicks off this week for some of the large American companies, and risk sentiment is expected to follow suit, particularly if companies return to profitability in the quarter.

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