Dollar outlook: Kiwi may be capped at 69 US cents

Monday 7th September 2009

The New Zealand dollar may be capped at 69 US cents this week ahead of the central bank’s monetary policy statement, which will likely keep interest rates at their current level while indicating a move away from an easing bias.

Four of eight economists and strategists in a BusinessWire survey predict the currency won’t break through 69 US cents, a level it hasn’t exceeded in about 12 months, as the Reserve Bank keeps rates at a record low on Thursday.

Three expect the currency to push higher this week because stronger employment data in the US has stoked risk appetite, while one forecasts the kiwi dollar will decline this week.

Economists predict central bank Governor Alan Bollard will hold the official cash rate at 2.5%, and speculation is growing that he will remove the easing bias from his statement as the economy begins to return to growth.

Bollard slashed 575 basis points from the benchmark interest rate when he embarked on the steepest series of cuts to the rate in July last year as he tried to revive the economy mired in the deepest recession since the 1970s.

“We’ll be looking for a slight rejigging of the statement around Bollard’s comments that interest rates will remain at or below current levels until late 2010,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney.

“We predict the kiwi will outperform on the crosses,” but will remain bound in its current ranges against the greenback as a decline in risk sentiment sees investors seek out the relative safety of the US dollar, she said.

Trinh expects the currency will trade between 68.40 US cents and 69 cents after finance chiefs of the Group of 20 nations talked down an early exit from extraordinary policy measures to combat the global economic downturn.

The US economy shed fewer jobs than expected last month, reigniting demand for higher-yielding, or riskier, assets, according to Labor Department data out last week.

Non-farm payrolls fell 216,000, less than the 230,000 predicted, and down from 276,000 in July. The kiwi climbed to 68.86 US cents from 68.21 cents on Friday in New York, and failed to break the 69 cents level for the eighth time.

Tim Kelleher, vice president of institutional markets at Commonwealth Bank of Australia, said with the markets closed in the US today for a public holiday, the kiwi could break its 69 US cents cap on light trading volumes.

Still, he doubts the currency will break above 70 cents before Bollard removes his easing bias in Thursday’s statement.

“Something should happen in the next 24 to 48 hours to see the kiwi grinding higher,” Kelleher said. “It should see some initial resistance around 69.50 cents.”

Khoon Goh, senior markets economist at ANZ National Bank, said a slew of data out of Australia should underpin the Australian dollar as investors retain an upbeat outlook for the so-called Lucky Country.

The Australian dollar surged to 85.30 US cents from 84.12 cents on Friday in New York. “The risk to the kiwi is that it gets dragged higher by the Australian dollar,” Goh said.

He expects the currency will gain against the greenback this week.

Retail sales, employment, business conditions and consumer confidence data releases are expected to show an improvement in the state of Australia’s economy this week, but will probably fail to meet market expectations. Investors have been bullish about Australia, which has skirted recession, and the market has begun preparing for a hike in interest rates before Christmas.

The prospect of a trans-Tasman currency was raised by Ministry of Foreign Affairs and Trade secretary John Allen in an interview on TV One’s Q&A programme after Prime Minister John Key ruled it out last month.

“New Zealand needs to continue to be thoughtful about being a small currency, exposed to significant volatility, particularly as a trading nation, because when you talk to exporters, one of the primary concerns that they have is the volatility of our currency, it's one of the primary barriers that they face in the delivering – actually entering the export market,” Allen said.

“That’s been ruled out by Mr Key in his recent speeches, but I do think that there's heaps that we can do with Australia, both in terms of the bilateral relationship.”

The kiwi fell to 80.71 Australian cents from 81.08 cents on Friday in New York.

Still, Trinh predicts the kiwi will gain against its trans-Tasman counterpart this week with the data releases likely to fall short of market expectations.

“Any disappointment is going to see the Aussie dollar come down as the markets get too far skewed” towards optimism, she said, referring to the currency colloquially.

Six of eight strategists expect the kiwi to remain in its current range on a trade-weighted basis, while one is picking a rise and one predicts a fall.

The currency rose to 63.63 on the trade-weighted index, or TWI, a measure of the kiwi against the greenback, yen, euro, pound and Australian dollar, from 63.24 last week in New York. It climbed to 64.22 yen from 63.33 yen last week, and advanced to an 11-month high of 48.12 euro cents from 47.83 cents. The kiwi rose to 41.98 pence from 41.72 pence on Friday in New York.

On the data radar this week is the Bank of England’s review of monetary policy and the release of the US Federal Reserve’s beige book.

Domestically, several indicators for second-quarter gross domestic product – terms of trade and value of construction work - may underpin the currency if they continue to show the economy is improving.

Businesswire.co.nz

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