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NZ Dollar Outlook: Europe clouds kiwi's fortunes

Monday 10th May 2010

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Lingering concerns about how European policymakers will deal with the prospect of a widening debt crisis will weigh on the kiwi dollar, with the currency expected to continue in its recent range this week.  

Five of eight economists and strategists surveyed by BusinessWire predict the currency will stay in its current range as investors await the outcome of Europe’s measures to bring stability to the region. One expects the kiwi will gain this week, while one is neutral with an upward bias on the currency. The last economist predicts the currency may head lower this week.  

European finance ministers are in Brussels nutting out the details of a plan to create stability in the Euro-zone after, after the threat of Greece’s sovereign debt issues spreading throughout the region prompted global markets to tumble last week. The European Commission members have yet to finalise a deal which is believed to be worth some 500 billion euros and will let the commission borrow money guaranteed by member states.  

The kiwi slipped to 55.74 euro cents from 55.83 cents on Friday in New York amid optimism a rescue proposal is nearing completion. The euro gained 1.4% to 1.2883 per US dollar over the weekend.  

“The markets are heavily short on the euro, and there’s a risk we get a massive short squeeze which would cause a spike up in the euro," lifting the kiwi with it, said Khoon Goh, senior markets economist at ANZ New Zealand.  

Goh said the kiwi will probably stay in familiar ranges this week, with reaction to the European politicians’ plan likely to give currency markets their cues.  

The kiwi gained to 71.72 US cents from 71.11 cents on Friday in New York after strong US employment data helped erode some of the pessimism among investors.  

Derek Rankin, director at Rankin Treasury Advisory, has an upwards bias on the kiwi dollar this week after strong data in the US continued to underpin the global economic recovery.  “The underlying data is still pretty good, though the market’s focused on sovereign debt,” he said. “Europe needs to put together a big package to secure their economy.”

Supporting the kiwi is the Reserve Bank of New Zealand’s move to tighten rates, as traders bet Governor Alan Bollard hikes the official cash rate 206 basis points in the coming 12 months, according to the Overnight Index Swap curve. That’s compared to 50 basis points of hikes to Australia’s target cash rate predicted according to the OIS curve.  

UBS New Zealand economist Robin Clements said the Reserve Bank of Australia has its benchmark interest rate where it wants them, and that the kiwi dollar should pick up against its trans-Tasman counterpart. The kiwi edged up to 80.02 Australian cents from 79.92 cents on Friday in New York.  

Last week’s strong employment data, which showed New Zealand’s jobless rate dropped to 6% in the first three months of this year, has investors heavily weighted towards a hike in June, according to Deutsche Bank chief economist Darren Gibbs.  

“Provided Europe doesn’t implode, we’ll get an increase in June,” Gibbs said. He predicts the kiwi will stay in a range this week, with strong support around 71 US cents.  

The pound gained 1.7% against the greenback, and the kiwi slipped to 48.34 pence from 48.76 pence on Friday in New York after its general election delivered a hung parliament as expected.  

Rankin Treasury’s Rankin said the kiwi is “close to the end of its run” against the pound, and that while it may not tumble lower on the cross-rate, as it a new government emerges to deal with the looming fiscal crisis investors will get less pessimistic about the state of the U.K. 

Six of eight strategists surveyed by BusinessWire predict the kiwi will stay in its current ranges on a trade-weighted basis, while the other two expect it to gain.  The kiwi increased to 67.90 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 67.70 on Friday in New York, and it climbed to 65.94 yen from 65.44 yen.  

Mike Jones, strategist at Bank of New Zealand, said he expects the kiwi to “outperform on the crosses and the TWI will push up this week” as New Zealand’s economic recovery continues to play out and the central bank gets closer to hiking interest rates in June.  

On the data radar this week, is April’s electronic card transactions tomorrow, and March retail sales on Friday. Real Estate Institute of New Zealand housing data is also out on Friday.  

The Bank of England will review its benchmark interest rate today, and isn’t expected to announce any surprises as the Liberal Democrats and Conservative Party continue to negotiate the formation of a new government.

Australia’s Federal Budget comes out tomorrow, and Wednesday will see the release of Australian employment data.  

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