Dollar outlook: Kiwi may fall amid US economic stimulus

Monday 9th August 2010

The New Zealand dollar may fall this week amid speculation the Federal Reserve will ramp up its response to the prospect of a double-dip recession in the world’s biggest economy.

Three of seven economists and strategists in a BusinessDesk survey predict the kiwi will fall this week, while two more have a downward bias, amid talk the Federal Open Market Committee will embark on further quantitative easing when it meets on Tuesday in the US.

One economist predicts the kiwi will trade in a range against the greenback this week, while another is neutral with an upward bias.

The kiwi climbed to 73.12 US cents from 72.84 cents on Friday in New York after the world’s biggest economy shed twice as many jobs as expected last month, sapping investors’ appetite for the greenback and compounding fears the US is heading for a new wave of economic weakness.

That’s seen a turnaround in the number of traders betting against the greenback, with US$15 billion worth of short positions this week, compared to $US$6 billion last week, according to International Money Market data. A short position is where investors sell an asset in the expectation they can buy it at a cheaper price.

“The market is expecting the Fed is going to announce some additional measures to help the US economy, though we don’t think that will happen,” said Darren Gibbs, chief economist at Deutsche Bank New Zealand.

Gibbs predicts the kiwi will face downward pressure this week with the FOMC meeting the key event.

China releases second-quarter manufacturing data on Wednesday and any indication of slowdown in the world’s third-biggest economy will likely sap investors’ appetite for the trans-Tasman currencies which have benefited from strong Chinese growth over the past year.

Ongoing weakness in New Zealand’s housing market and a fourth straight fall in the price of Fonterra’s milk powder kept investors downbeat on the outlook for the economy, though this was trumped by US dollar weakness.

Real Estate Institute of New Zealand house price data on Friday is expected to show the property market is still subdued, while June’s retail sales will likely show consumer spending grew 0.5% in the month, for a quarterly increase of 0.3%.

The weakness in New Zealand’s economy will probably bear itself in the kiwi’s cross-rates, with five of seven economists surveyed by BusinessDesk predicting the currency will fall on a trade-weighted basis. The other two have a negative bias. The kiwi was little changed at 67.21 on the TWI from 67.23 on Friday in New York.

Derek Rankin, director at Rankin Treasury Advisory, said the retail data will probably show people are still reluctant to spend after Europe’s sovereign debt crisis sent jitters into the markets through May and June.

“You can’t have the disruptions in Europe without everyone getting very wary and closing their wallets,” Rankin said. He predicts the kiwi will trade between 72 US cents and 74 cents this week and will probably fall.

The Bank of Japan will review its target cash rate tomorrow, and while it’s expected to hold the rate steady at 0.1%, investors will be looking to see whether the central bank makes any noises about the strength of the yen. The yen surged to a 15-year high 85.40 per US dollar as risk averse investors piled into the Japanese currency as opposed to the greenback. The kiwi dropped to 62.41 yen from 62.69 yen last week.

The major data even in Australasia will be Australia’s labour data on Thursday which is expected to show unemployment held at 5.1%. The kiwi dollar edged up to 72.69 Australian cents from 79.59 cents on Friday in New York.

The Bank of England’s inflation report on Wednesday in the UK is expected to predict a slower outlook for economic growth amid accelerating prices over the next 18 months, according to a Sunday Times report.

The kiwi dropped to 45.77 pence from 45.93 pence on Friday in New York, and fell to 55.03 euro cents from 55.26 cents last week.

On the data radar this week is last month’s electronic card transactions tomorrow, which account for three-quarters of the retail trade survey, and the BNZ-Business New Zealand performance of manufacturing index on Thursday, while New Zealand’s corporate earnings season kicks off properly the same day.

Businesswire.co.nz

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