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NZ Dollar Outlook: Kiwi may fall to 74 US cts as Euro debt fears linger

Monday 29th November 2010

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The New Zealand dollar may fall to 74 US cents this week after investors' appetite for riskier, or higher-yielding, assets remains muted amid lingering fears over Europe's sovereign debt crisis.

All eight economists and strategists in a BusinessDesk survey predict the kiwi will fall this week, with seven picking 74 US cents as the bottom of the range. Investors are sizing up which European nation will be the next to succumb to debt woes after the European Union and International Monetary Fund approved an 85 billion euro bail-out for Ireland, the second such aid package after Greece.

The sign-off on Ireland's bail-out has given the kiwi a bounce today, but the focus will likely shift to Portugal's ability to repay debtors throughout the week, and take the gloss off higher-yielding, or riskier, assets. Spanish Prime Minister Jose Luis Rodriguez Zapatero warned speculators betting on his country defaulting "are going to be wrong." The kiwi fell to 75.20 US cents from 75.51 cents on Friday in New York and slipped to 56.61 euro cents from 56.88 cents.

"There are sovereign debt concerns around Portugal, but the bigger problem is Spain - if you add Portugal, Ireland and Greece together, Spain almost doubles them," said Derek Rankin, director at Rankin Treasury Advisory. "The constant tone of weaker European news will hold the New Zealand and Australian dollars back."

Rankin expects the kiwi will fall towards 74 US cents this week, and if it breaks through that level it could go lower.

Hungary also has investors concerned after its government told citizens to shift private pension funds into government control or lose their state superannuation. Belgium is also in the spotlight as public debt is forecast to top 100% of gross domestic product this financial year as politicians continue to negotiate to form a coalition government.

American data will be a talking point this week with non-farm payrolls expected to show the world's biggest economy added 145,000 jobs this month when it's released on Friday, according to Bloomberg, while Federal Reserve chairman Ben Bernanke will be giving a speech on Wednesday. US manufacturing will also feature.

Darren Gibbs, chief economist at Deutsche Bank NZ, said strong employment numbers could underpin the greenback, and push the kiwi lower. He's picking the kiwi to extend its decline this week.

The Australian economy probably grew 0.5% in the three months ended September, according to a Reuters survey, but economists are flagging a surprise to the downside. Reserve Bank of Australia Governor Glenn Stevens told politicians last week that the tightening cycle will probably stay on hold in the immediate future.

Khoon Goh, head of market strategy and economics at ANZ New Zealand, said Australian GDP could come in flat, which would see the kiwi follow the Australian dollar lower against the greenback, but gain against its trans-Tasman neighbour. The kiwi was little changed at 77.70 Australian cents from 77.73 cents last week.

If the GDP data disappoints, "we'll certainly see the Australian currency under a bit of selling pressure," he said. "Where the Aussie goes, the kiwi follows."

Today's National Bank Business Outlook will be the major driver of the currency locally, though Wednesday's building permits data and commodity prices along with Fonterra Cooperative Group's online auction will also be watched.

Everyone surveyed was downbeat on the currency on a trade-weighted basis, though one said the index, which is what the central bank uses to measure the currency's performance, has remained fairly stable in the face of the greenback weakness. The kiwi fell to 68.27 on the trade-weighted index of major trading partners' currencies from 68.54 last week, and dropped to 63.24 yen from 63.38 yen. It edged up to 48.20 pence from 48.09 pence last week.

Chinese and European manufacturing is on the radar this week, as is heightened military posturing between North and South Korea.

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