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NZ Dollar Outlook Kiwi may gain as G7 leaders meet, RBA looms

Tuesday 5th June 2012

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The New Zealand dollar may rise this week as leaders of the Group of Seven nations meet to discuss Europe’s debt crisis and the Reserve Bank of Australia reviews monetary policy amid speculation it will slash the cash rate.

The New Zealand dollar recently traded at 75.86 US cents, up from 75.70 cents at 8am. That's right in the middle of this week's predicted trading range of 74.50 cents to 77.35 cents, according to a poll of six analysts by BusinessDesk.

Of the analysts surveyed, four said the kiwi will finish the week higher and two lower.

Leaders of the G7 have agreed to discuss Europe's debt crisis via an emergency conference call on Tuesday. Spain is likely to be top of the agenda after the nation's fourth-biggest bank, Bankia SA asked for 19 billion euros of state funding last week after it increased its provision for bad debts. That's more than the 15 billion euro government estimate to shore up the entire sector.

European policymakers are also considering steps to strengthen the euro zone’s structure, agreeing to discuss closer banking cooperation after the European Commission called for a “banking union” to integrate tighter supervision of lenders and create a pool of EU funds to clean up banks with cross-border exposure.

"Any more-positive tale around a fiscal union in Europe will be a plus," said Imre Speizer, market strategist at Westpac Banking Corp. "Policy makers should be starting to talk about what steps they could announce soon to put up a firewall about the crisis."

The kiwi was unchanged on 77.79 Australian cents from 8am as the Reserve Bank of Australia prepares to review its target cash rate this afternoon. In May the RBA cut rates by 50 basis points to 3.75 percent, closing the gap with New Zealand's 2.5 percent official cash rate.

Traders are beating the RBA will cut the cash rate by 141 basis points over the next 12 months, according to the Overnight Swap Curve. In New Zealand traders are pricing in a 45 basis point cut.

"The market positioning is how much, not if," the RBA will cut rates, said Peter Cavanaugh, senior client adviser at Bancorp. "It's really how dramatic the RBA is going to be - New Zealand could become more attractive if the RBA was to get exceedingly aggressive today."

The RBA meeting is followed by Australia's first quarter gross domestic product tomorrow and employment numbers on Thursday.

Central banks in Canada and Bank of England will also meet this week.

In the US, weak data has sparked speculation the Federal Reserve will be forced to add additional stimulus, with Chairman Ben Bernanke speaking to the congressional committee on Thursday about the economic outlook.

That comes after figures showed the world's largest economy added 69,000 works in May, according to the Labor Department. That's less than the 150,000 forecast in a Bloomberg poll. The jobless rate also edged up to 8.2 percent from 8.1 percent. US Factory orders also declined for the third time in four months, down 0.6 percent in April, according to the Commerce Department. Economists had expected a 0.2 percent rise.

"All the data does is bring forward QE3 and as a result the kiwi and the Aussie will be supported," said Daniel Brdanovic, head of institutional sales and global markets at HSBC.

In April, Fed minutes showed policymakers acknowledged a loss of momentum in US growth could warrant a third round of quantitative easing, or QE3.

New Zealand figures out this week include Fonterra GlobalDairyTrade auction on Wednesday. In May the dairy exporter cut its forecast 2012 milk price and flagged lower payments in 2013 in response to a slide in global prices for dairy commodities. The cuts were expected given prices in the fortnightly auctions have shed 41 percent in the past 12 months.

"Fonterra is probably the one to watch, certainly for the currency - this auction is a little bit harder to pick," said Mike Jones, a strategist at Bank of New Zealand.

The government financial statements for the 10 months ended April 30 are due for release tomorrow. The March quarter's value of building work is also due out tomorrow, followed by the wholesale trade survey from Statistics New Zealand on Friday.

BusinessDesk.co.nz

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