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NZ Dollar Outlook: Euro fears loom large for kiwi ahead of this week's Budget

Monday 17th May 2010

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The New Zealand dollar faces a downward spiral this week as fears about Europe’s sovereign debt crisis sap investors’ optimism for the region’s economic recovery, sapping risk appetite ahead of the government’s budget.  

All six economists and strategists surveyed by BusinessWire predict the currency will fall this week amid concerns the debt crisis plaguing the so-called PIGS (Portugal, Ireland, Greece and Spain) will spread across Europe.  The kiwi climbed above 57 euro cents for the first time in almost three years as investors spurned Europe’s collective currency amid fears the region’s debt problems will spread to more stable nations, and set the market chattering that the euro’s future might be unstable.

Reports that French President Nicolas Sarkozy threatened to leave the union if Germany didn’t back up the EU’s stabilisation package were denied, though sentiment had already tumbled with European Central Bank President Jean Claude Trichet saying a “quantum leap in the governance of the euro area” was needed.  

The kiwi held near a three-year high at 57.16 euro cents, and sank to 70.57 US cents from 71.14 cents on Friday in New York.  “Fears of euro contagion remain quite strong,” said Imre Speizer, markets strategist at Westpac Banking Corp. “We should see the kiwi head down to 70 US cents, which might hold, but if it falls, 68 cents is the next level of support.” 

“New Zealand story remains positive” and should outperform other so-called risk currencies, such as the Australian and Canadian dollars, with data last week showing a surge in local manufacturing activity, Speizer said.

Still, the BNZ-Business NZ Performance of Services Index slipped 2.6 points last month, showing a contraction in retail trade, accommodation, cafes and restaurants.  

Robin Clements, economist at UBS NZ, says the government’s budget will be the focus of New Zealand’s domestic news and is expected to show a better fiscal position for the country’s books, which will give the currency some support. Still, most of this has been well-signalled, and tax cuts and GST increases have already been priced in by the market, he said.  

“We’ll generally see the currency with a downward bias coming from Greece and Europe’s performance – it’s adverse for risk” and will keep the kiwi under pressure, Clements said.  

Darren Gibbs, chief economist at Deutsche Bank, said the kiwi dollar will probably hold at 70 US cents this week with investor sentiment “getting close to the bottom” after the past two weeks, as economic data improves.  

“Data flows are starting to get good, particularly in Asia and the US,” he said. US data continued to show the world’s largest economy is recovering, with April retail sales and industrial production beating expectations.

The Dollar Index, which measures the greenback against a basket of six major currencies, hit a new 12-month high at 86.27 as investors continued their flight to so-called safe havens. 

Westpac’s Speizer agrees there might be a turnaround in the euro’s fortunes in the coming three weeks with the negative sentiment causing the currency to get oversold.  

“We’ve got a recommendation to go short the US dollar against all currencies over the next three weeks,” Speizer said, referring to the strategy where traders sell an asset in the expectation they can buy it back at a cheaper price. “We expect the US dollar to weaken over the next one to three weeks – it’s not going to be as strong as it has been.”  

All six strategists surveyed predict the kiwi will hold up on a trade-weighted basis with weakness in the euro and pound propping up the TWI. The kiwi fell to 67.91 on the trade-weighted index from 68.19 on Friday in New York, and slipped to 48.58 pence from a post-float high 49.02 pence. It tumbled to 65.15 yen from 65.64 yen last week. 

Speizer said the kiwi will probably continue to hold around its current levels against the Australian dollar, though the prospect of looming rate hikes was beginning to see investors prepare to ship their cash across the Tasman.

Central bank Governor Alan Bollard is expected to lift the official cash rate 192 basis points over the coming year, according to the Overnight Interest Swap curve.

The kiwi was little changed at 79.70 Australian cents from 79.74 cents. On the data radar this week is the producer prices index tomorrow and April’s migration data and the ANZ consumer confidence survey on Friday.

Reserve Bank of Australia minutes out tomorrow aren’t expected to hold too much for currency watchers, with most of the focus on the German Zew and IFO business surveys released tomorrow in Europe.  

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