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NZ Dollar Outlook: Accelerating economy may limit dips in kiwi

Monday 22nd March 2010

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The New Zealand dollar may be supported this week by data expected to show the domestic economy grew at its fastest pace in two years, limiting the currency’s dips below 70 US cents. 

Five of seven economists and strategists in a BusinessWire survey predict dips below 70 US cents will be limited. Three strategists forecast the kiwi will trade in a range this week, while one is picking it will edge lower, though won’t fall below 70 cents. Two economists expect the kiwi will decline this week, and one predicts it will gain.  

GDP expanded 0.8% in the three months ended December 31, its fastest pace since the same quarter of 2007, according to a Reuters survey, with forecasts ranging between 0.5% and 1.2%. The central bank forecast a 0.6% expansion for the period in its March monetary policy statement. In June last year, New Zealand climbed out of its worst recession in 19 years, though the fourth quarter is expected to show the first period of marked growth in what has been a tepid recovery.  

“If the data comes in line with expectations, the kiwi probably won’t do anything” this week with global pressures likely to weigh on risk sentiment, said Ben Potter, research analyst at IG Markets in Melbourne. “The kiwi will probably move back towards 70.50 US cents or 70 even – there’s pretty good support there.”  

The kiwi sank to 70.61 US cents from 71.16 cents on Friday in New York as investors became wary about higher-yielding, or riskier, assets after the Reserve Bank of India hiked both the reverse repurchase rate and repurchase rate by 25 basis points to 3.5% and 5% respectively. 

Potter said the surprise hike, which came a month before a scheduled monetary policy meeting, bolstered support for the greenback as investors prepare for potential rate hikes in China, which will damp demand for so-called commodity currencies such as the Australian and New Zealand dollars.  

Derek Rankin, director of Ranking Treasury Advisory, said the kiwi would face downward pressure this week from the ongoing problems coming out of Europe.

Questions remain over the viability of an EU bail-out for Greece after German Chancellor Angela Merkel told her Parliament that the International Monetary Fund may be the only solution to the Mediterranean nation’s debt woes.  

“It’s deeply unpopular in Germany to bail out other nations,” Rankin said. He predicts the kiwi will push down to about 69.50 US cents. 

The European Union will hold a summit at the end of this week, and Bank of New Zealand currency strategist Danica Hampton expects this will dominate global sentiment for riskier assets such as the New Zealand dollar.

Hampton predicts the kiwi will trade between 70 US cents and 71.50 cents this week, with dips below the 70 mark to attractive for buyers.  Imre Speizer, markets strategist at Westpac Banking Corp., said the greenback was finding a lot of support due to the ongoing concerns about Europe, which in turn weighed on the kiwi against the U.S. dollar.

Still, the weakness was underpinning support for the New Zealand currency on the cross-rates against the euro and the pound, which he predicts will hold above 52 euro cents and 47.50 pence this week. The kiwi dropped to 52.22 euro cents from 52.33 cents on Friday in New York, and edged up to 47.07 pence from 46.98 pence.  

Other New Zealand data out this week is the current account on Wednesday probably showed the balance of payments in the fourth quarter shrank to $3.62 billion, or 1.9% of GDP, from $5.7 billion, or 3.1%, according to a Reuters survey. Meanwhile, data on Friday will show the trade balance was a surplus of $480 million in February, according to Reuters.  

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said New Zealand’s stronger economic data should undo any weakness in the kiwi from concerns in the Euro-zone, and was the only strategist to pick the currency up on the week.

He predicts it will trade between 70 US cents and 71.25 cents.  The kiwi dollar will probably gain on a trade-weighted basis this week, according to three of seven strategists surveyed by BusinessWire.

The other four expect the trade-weighted index, or TWI, a measure of the currency against the greenback, yen, euro, pound and Australian dollar, will remain in recent ranges, though faces an upward bias. The TWI sank to 65.47 from 65.71 on Friday in New York. The kiwi dropped to 63.92 yen from 64.36 yen last week, and declined to 77.30 Australian cents from 77.34 cents.  

On the radar this week will be the U.K. budget out on Thursday, which comes after the Bank of England’s Monetary Policy Committee member Andrew Sentance said the U.K. could face a “double-dip recession” in an interview on CNBC.

Meanwhile, the Reserve Bank of Australia’s Assistant Governor Philip Lowe and Governor Glenn Stevens will give speeches on Thursday and Friday respectively.  

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