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Dollar outlook: Kiwi may weaken further amid fears of global downturn

Monday 19th July 2010

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The New Zealand dollar may fall this week, taking its lead from global equity markets that have punished companies reporting anything other than superlative earnings amid fears global economic growth may dissipate.

The kiwi dollar will probably slip against the US dollar and weaken on a trade-weighted basis, according to all seven economists and strategists in a BusinessDesk survey. Of those that gave a trading range for the week, the gloomiest had the kiwi trading as low as 68 US cents with gains capped at 71.50-72 cents.

The kiwi sank to 70.68 US cents in early trading today, from 71.70 cents on Friday in New York. It attempted to break through 73 cents last week, falling just short, and has climbed 7.2% since early June. It tumbled to 66.65 on the trade-weighted index of major trading partners’ currencies from 67.31.

“At the moment risk appetite seems to be on the wane,” said Mike Symonds, head of sales and forex at Bank of New Zealand.

“Increasingly people are concerned about the health of the US economy and believe some of the data points to the potential for the U.S. economy to slip back into recession.”

The Standard & Poor’s 500 Index tumbled 2.9% on Friday. While many companies on the S&P 500 posted earnings that beat estimates, though investors were quick to punish any weakness in the results. Bank of America shares tumbled more than 9% after it reported tepid sales.

Adding to the gloomy tone, a survey showed US consumer sentiment sank to an 11-month low. More bad news may be looming this week, with US housing data due on Tuesday and Federal Reserve chairman Ben Bernanke due to give his latest take on the US economy on Thursday.

Before then, the Bank of Canada reviews interest rates with the expectation for the 25 basis point hike priced in, which may colour how traders think about the prospects of interest rate increases in New Zealand on July 29 and Australia on August 3. A public holiday in Japan may cap trading volumes in Asia today.

Faltering risk appetite last week sets the tone for a weaker start to this week, with investors more risk averse globally which will be “a depressor for the kiwi,” said Imre Speizer, senior markets strategist at Westpac.

The kiwi currency traded at 81.42 Australian cents from 81.57 cents on Friday in the US The kiwi may gain against its trans-Tasman counterpart in the run-up to Australian general election on August 21, Speizer said.

Ahead of that, Australian inflation figures next week may be strong enough to spur the RBA to raise interest rates at its next meeting. Still, Derek Rankin of Rankin Treasury Advisory said there’s a chance the RBA will want to avoid moving on interest rates in the run-up to the election, so as not to be seen to be swaying the political debate. The RBA is also scheduled to release the minutes of its last policy meeting this week.

A mild increase in New Zealand’s consumer price index in the second quarter indicates the RBNZ “isn’t under pressure to do too much” in raising the official cash rate.

“There’s no rush –it will be slow and steady.”

A quarter point increase to 3% is expected this month, based on a Reuters survey.

Poor sentiment for the greenback may spread to the euro this week, with the latest results of European bank stress tests due after European markets close on Friday. That may push investors to the yen, as a safe-haven currency, though with Japanese yields so low, such a move probably won’t endure, Rankin said.

The kiwi weakened to 60.95 yen today from 62.57 yen on Friday. It declined to 54.61 euro cents from 55.24 cents last week, and slipped to 46.03 British pence from 46.63 pence.

With more S&P 500 companies scheduled to report this week, currency dealers have become “pseudo-equity traders at the moment,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia.

The sell off in US equities on Friday “just goes to show how much is built into those equity markets” with harsh punishment for any failures, he said.

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