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NZ Dollar Outlook: Kiwi to take a breather as Irish seek bailout

Monday 22nd November 2010

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The New Zealand dollar will likely spend another week in a tight range after the Irish government confirmed it's seeking a bail-out from the International Monetary Fund and European Union.

All eight economists and strategists in a BusinessDesk survey expect the kiwi to tread water this week, though three have an upward bias and one leans towards the downside. That comes after Ireland's government accepted a proposal by Finance Minister Brian Lenihan to apply for funds from the EU and IMF to help fund itself and rescue its troubled lenders. That's the second regional bail-out after Greece, and is expected to shift the market's focus on to the debt woes of Portugal.

"We've had a relief rally on the back of the Irish rescue package," said Tim Kelleher, head of institutional FX sales New Zealand at ASB Institutional. "People are going to be very careful about Portugal - it's taken down Greece, Ireland, Portugal's next, then Spain."

Kelleher has a negative bias on the kiwi this week, predicting it will trade between 77 US cents and 78.75 cents with wider European sovereign debt concerns likely to keep investors downbeat. The kiwi rose to 78.01 US cents from 77.81 cents on Friday in New York.

Appetite for riskier, or higher-yielding, assets is likely to stay under pressure this week, with American stocks on the back-foot amid an insider-trading probe into investment bank Goldman Sachs Group, Kelleher said. US federal authorities are close to completing a three-year investigation and are preparing charges that could capture traders, banker and consultants nationwide, the Wall Street Journal reported.

Local data flows are light this week, with today’s migration figures showing a slow-down in net gain of inbound migrants last month as more New Zealanders headed across the Tasman. Australia managed to dodge recession last year on the back on strong Chinese demand for its raw materials.

The Reserve Bank's survey of expectations is expected to show two-year inflation forecasts are still within the bank's target band of between 1% and 3%, and will do little to deter investors. The market is betting central bank Governor Alan Bollard will hike rates 83 basis points over the coming 12 months, according to the Overnight Index Swap curve as he keeps rates low to stoke a stalling recovery.

Derek Rankin, director at Rankin Treasury Advisory, said the currency faces a quiet week though it's still in an uptrend, with looming interest rate hikes, high commodity prices and the start of seasonal export pressures keeping the kiwi buoyant. He said the kiwi dollar is still on target to breach its post-float high 82.50 US cents.

The People's Bank of China hiked the renminbi reserve requirement ratio, the level of funds lenders have to keep on hand, half a percentage point as it seeks to clamp down on inflationary pressures. The kiwi rose to 5.1719 yuan from 5.1684 yuan last week, and gained to 78.87 Australian cents from 78.65 cents.

Khoon Goh, head of market economics and strategy at ANZ New Zealand, said Australia's greater exposure to China meant the currency faces more downside from a cooling off in the world's second-largest economy, and with greater liquidity in markets as a result of the Federal Reserve's second round of asset purchases, people are looking to park their money in other investments such as the kiwi dollar.

"At some stage people will decide to get out and we could see some big movements in the kiwi," Goh said.

All eight strategists surveyed predict the kiwi will stay in recent ranges on a trade-weighted basis, though three have an upward bias and one leans towards the downside. The kiwi rose to 69.65 on the trade-weighted index of major trading partners currencies from 69.52 last week, and increased to 65.06 yen from 64.85 yen.

Rankin said the kiwi is holding up well on the cross-rates, with reinsurance claims helping to underpin its strength against the euro and pound as insurance companies are forced to buy New Zealand dollars. The currency slipped to 56.76 euro cents from 56.87 cents on Friday in New York, and rose to 48.73 pence from 48.41 pence.

On the data radar this week is an American third-quarter gross domestic product estimate on Tuesday and Federal Reserve minutes on Wednesday ahead of Thanksgiving Holiday on Thursday and Friday. Australian capital expenditure data on Thursday will be watched, as will Reserve Bank of Australia Governor Glenn Stevens' appearance before a Parliamentary committee on Friday.

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