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NZ Dollar Outlook: Kiwi likely to stay below 71 US cents this week

Monday 22nd February 2010

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The New Zealand dollar will likely be capped below 71 US cents this week with prospects for the greenback to strengthen as the world’s largest economy resumes is gradual recovery.  

Five of seven economists and strategists in a BusinessWire survey are picking the currency to hold below 71 US cents this week as investors continue to support the greenback. Three expect the kiwi to decline this week, two predict it will trade in recent ranges, and the last two forecast gains in the New Zealand dollar.  

In a move that surprised markets on Friday, the Federal Reserve hiked its discount rate, the rate charged to banks for direct loans, by 25 basis points to 0.75%, adding support for the US dollar and knocking the kiwi by more than a cent.

Fed officials talked down the likelihood of an early hike in interest rates, saying the central bank’s timeline was still in place. The kiwi retraced about two-thirds of its losses from the discount rate hike, and recently traded at 69.95 cents from 69.60 cents on Friday in New York.  

“Clearly, the US dollar is going higher as US rates rally through the end of the year,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. “As soon as we see jobs start to turn (in the US), it will be a catalyst” for the greenback to gain, he said.  

Kelleher recommends investors sell the kiwi on rallies, and predicts it will trade between 69 US cents and 70.75 cents.  

Westpac Banking Corp. is reasonably bearish on the kiwi in the medium-term due to the latent support for the greenback, though markets strategist Imre Speizer said if the currency pushed above 70.80 US cents, they would need to reassess their position on the New Zealand dollar.  

“It’s not really about risk aversion, rather it’s about US growth and the gradual normalisation” of America’s economy, Speizer said. “As we move towards a more normal environment, overall it should be supportive for the U.S. dollar.” 

Most investors will be watching to see what Federal Reserve Ben Bernanke has to say when he testifies before the Senate.

This month, the Dollar Index, a measure of the greenback against a basket of six currencies, climbed above 80 for the first time since July, and it was recently at 80.53, from 81.15 on Friday in New York.  

Khoon Goh, senior markets economist at ANZ National Bank, said the currency will take its direction from global markets, though the Reserve Bank of New Zealand’s survey of inflation expectations on Wednesday and the National Bank Business Outlook on Thursday could move the kiwi around.  

“The currency could potentially move higher,” Goh said.  “70.20-70.80 (U.S. cents) are the key resistance levels – it will struggle to get through that.”  

Traders will be watching the Australian cross rate this week as it continues to press towards 77 Australian cents, a level the kiwi hasn’t broken below since December 2000. The kiwi recently traded at 77.67 cents from 77.97 last week.  

Mike Jones, strategist at Bank of New Zealand, said the kiwi was trading about 2% below the entire trading level history, and that “reflected the Australian economy marched ahead” of its trans-Tasman counterpart some time ago.  

The cross may get tested when Reserve Bank of Australia Deputy Governor Ric Battellino speaks in Sydney tomorrow, as the central bank official is known for talking up the prospects of the Australian economy.  

The kiwi slipped to 51.42 euro cents from 51.56 cents on Friday in New York and was little changed at 45.27 pence from 45.20 pence amid greater certainty over Greece’s fiscal outlook. The European Union wrote off a bailout package for the debt-ridden nation, but reaffirmed a timeline for the Mediterranean nation to slash its deficits.  

Deutsche Bank chief economist Darren Gibbs said there’s talk of a potential bond issuance, and “if they can get that away it would be very positive for the market.” 

The kiwi climbed to 64.23 yen from 63.84 yen on Friday in New York, and was little changed at 65.00 on the trade-weighted index, or TWI, a measure of the NZ dollar against a basket of five currencies, from 64.90.  

On the data radar this week is the trade balance and new building consents issued in January out on Friday. On the same day, US existing sales will be one to watch, with expectations for a bounce in the data series.

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