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NZ Dollar Outlook: Kiwi may gain as central bank policy review looms

Monday 26th April 2010

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The New Zealand dollar will push toward 72 US cents and may advanced against the Australian dollar as the Reserve Bank’s official cash rate review looms on Thursday.  

All seven strategists and economists in a BusinessWire survey either picked a stronger kiwi dollar, or gave it a positive bias, for the week as they prepare for central bank Governor Alan Bollard’s statement which may give a hint as to when monetary policy tightening will begin.

Investors are preparing for New Zealand’s central bank to embark on tighter monetary policy after 12 months of record-low interest rates, and Bollard’s signalled mid-year hike gets closer. Support for the kiwi dollar has lagged behind its trans-Tasman counterpart, sinking to an 9 1/2-year low, after the Reserve Bank of Australia began hiking rates last October, and the so-called ‘lucky country’ is almost back to normal interest rates.

“There’s a growing sense in the market that the New Zealand story is on its way,” said Imre Speizer, markets strategist at Westpac Banking Corp. “The Australian story is good, but it’s been fully priced in across the board – we’re backing the kiwi for the short and long term” against the Australian dollar, he said.

Before the RBNZ statement, Australian consumer price index data for the first three months of this year are due for release on Wednesday, with inflation forecast to accelerate to 0.8% from 0.5% three months earlier. Last Friday, RBA Governor Glenn Stevens indicated Australian interest rates were almost back to normal, sapping expectations the central bank will hike rates in May.

Traders are betting the RBNZ will hike rates by 160 basis points over the next 12 months, according to the Overseas Interest Swap curve, compared to 87 points priced in for the RBA over the same period.

The kiwi rose to 77.41 Australian cents from 77.21 cents on Friday in New York.

Against the greenback, Speizer predicts the New Zealand dollar could charge another 30 points higher if it breaks above 72 US cents this week.

The New Zealand dollar was supported last week by an upswing in investor sentiment after debt-stricken Greece formally applied to tap a rescue package put together by the International Monetary Fund and the European Union members worth some 45 billion euros. Stronger business confidence in Germany and a surge in new home sales in the US stoked investors’ appetite for higher-yielding, or riskier, assets. It climbed to 71.74 US cents from 71.15 cents on Friday in New York.

Derek Rankin, director at Rankin Treasury Advisory, said the rescue package is far from a done deal for Greece, as a weak euro supports Germany’s exports, and may struggle to get past legislators in Europe’s largest economy. Germany is holding a regional election in May.

Rankin said it looks unlikely that the rescue package will be passed by every Parliament in the Euro-zone before May 19, when Greece’s next bond payment falls due.

The kiwi surged to a new 26-month high of 53.73 euro cents from 53.44 cents on Friday in New York. It recently traded at 53.64 cents.

Rankin said the kiwi faces a positive bias this week, and if it pushes beyond 71.90 US cents, its next target will be 76 cents.

Fonterra Cooperative Group’s board is expected to meet tomorrow, and speculation is growing that they may raise the dairy exporter’s forecast pay-out to farmers.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said there was a 50-50 chance of a higher pay-out, with the droughts offsetting the strong performance of milk powder on the company’s online trading platform.

Kelleher predicts the kiwi will trade between 71 US cents and 72.50 cents, with potential to push towards 73 cents. New Zealand’s currency has been underpinned by investors fleeing the yen after Fitch Ratings warned Japan was at risk of a downgrade as the world’s second largest economy gets deeper into debt.

“People are getting their money out of Japan and the yen crosses have slumped across the board,” he said. The kiwi climbed to 67.40 yen from 66.47 yen on Friday in New York.

Robin Clements, economist at UBS, said the National Bank Business Outlook on Wednesday would probably be supportive of the kiwi with confidence likely to remain elevated. Business activity should start picking up after the ANZ Roy Morgan consumer confidence survey showed a further improvement in customers’ sentiment, he said.

All seven strategist surveyed by BusinessWire expect the currency to gain on a trade-weighted basis, with the crosses supported by more upbeat global data and the prospect of rising local interest rates. The kiwi rose to 66.77 on the trade-weighted index, or TWI, a measure of the currency against a basket of five trading partners, from 66.33 on Friday in New York, and climbed to 46.62 pence from 46.38 pence.

On the data radar this week is the number of new building consents issued in March, along with that month’s trade balance. Offshore, the Federal Open Market Committee will review the Fed Fund Rate, and is expected to reiterate that US rates will remain low for an extended period.

As well, some 165 companies in the Standard & Poor’s 500 Index are expected to report their first quarter earnings this week, providing investors with more information about the health of the world’s biggest economy.

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