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NZ Dollar Outlook: Kiwi may fall as deadline for US spending cuts, NZ election loom

Monday 21st November 2011

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The New Zealand dollar may fall this week as the US attempts to cut at least US$1.2 trillion off its budget, stoking concern any hiccups could drive down equity markets and growth-linked currencies such as the kiwi.

The kiwi dollar traded recently at 75.84 US cents, up from 75.52 cents in New York trading on Friday. That’s right in the middle of the currency’s forecast range for this week of 74 cents and 77.50 cents, according to a BusinessDesk survey of six analysts. Four of the six strategists expect the kiwi will trade near the bottom of that range by the end of the week, while the other two predict it will be trading near the top of the range.

The analysts were unanimous in saying this week’s Nov. 23 deadline for the US Congress’s deficit-reduction will take centre-stage. The policymakers have to trim between US$1.2 trillion and US$1.5 trillion from the deficit to avoid some US$1.2 trillion of automatic spending cuts that would start in 2013.

The shift in focus to the US budget deficit “creates more uncertainty, and equities will remain weak,” keeping pressure on higher-yielding, or riskier, assets such as the kiwi, said Tim Kelleher, head of institutional FX sales New Zealand at ASB Institutional.

Concern about the looming US debt deadline has taken a backseat to Europe’s sovereign debt crisis over the past month, though the election of a new Spanish government and the installation of crisis administrations in Greece and Italy have helped quell those fears.

In August, US legislators reached an agreement to lift the $14.3 trillion debt ceiling through 2012, allowing it to borrow new funds and repay outstanding debt. When talks stalled in the lead-up to that deal, the kiwi dollar surged to a post-float high 88.40 US cents. The currency has since shed as much as 15 percent amid downgrades to the US credit rating and New Zealand’s own rating.

Dan Bell, senior currency strategist at HiFX said the US dollar “has been benefiting from the safe haven flows from the debt crisis in Europe,” but that’s likely to change when the US committee meets on Wednesday.

All of the analysts surveyed said New Zealand’s general election will have little effect on the currency’s direction, and the kiwi’s movements will be dictated by off shore events. New Zealanders will cast their votes on Nov. 26, and the latest opinion polls put the incumbent National Party steady at around 50 percent support and the opposition Labour Party on about half that at 26 percent, with the Green Party on about 13 percent.

That suggests the biggest uncertainty would be if National doesn’t get an outright majority and has to form a coalition with a smaller party. Markets were kept waiting in the inaugural Mixed Member Proportional election in 1996 when NZ First Leader Winston Peters dragged out negotiations for two months.

“Going into an election it is not unusual to see the markets being uncertain, considering the makeup of MMP,” said Michael Hollows, currency strategists at HiFX.

Investors will still keep one eye on how the Euro-zone is coping with its sovereign indebtedness, with Bloomberg reporting the European Central Bank may lobby the International Monetary Fund for loans that can be applied to sovereign bailouts.

Spain, whose government failed to attract much interest in a bond auction last week, has voted in a new conservative administration in a landslide victory that gives it a clear mandate to rein in government spending and tackle indebtedness.

Mariano Rajoy’s People’s Party won 186 seats of the 350-seat Congress, giving it the biggest majority for 29 years.

Italy’s new Prime Minister Mario Monti will meet his counterparts in Germany and France as investors push yields on Italian bonds to levels that may make the repayments unsustainable for the government.

Unless Italy moves fast on European Union-prescribed reforms, the country’s cost of borrowing funds will near the same levels as Greece, Ireland and Portugal.

Locally, migration and tourism numbers for October are out tomorrow and merchandise trade statistics for the same month are published on Thursday, though the results will have little effect on kiwi dollar, given global events, according to the analysts surveyed.

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