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NZ Dollar Outlook: Kiwi likely to hold above 68 US cents amid Europe debt issues

Monday 15th February 2010

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The kiwi dollar will likely hold above 68 US cents this week as sovereign debt problems continue to plague some European nations and weigh on investors’ appetite for risky, or higher-yielding, assets.  

Five of seven economists and strategists in a BusinessWire survey predict the currency will find a bottom near 68 US cents this week, amid ongoing uncertainty over the future of Europe’s debt issues as officials avoid giving a firm answer on the question of Greece’s bailout package. Four of the economists expect the kiwi dollar will fall this week, with the other three forecasting an upward bias for the currency.  

The conflicting statements by European officials over whether debt-stricken Greece will be bailed out by its fellows in the European Union has left investors nervous over the eventual outcome, and sapped their desire to seek out higher yields. EU finance ministers are meeting over the next two days, but it’s uncertain whether they will provide a clear plan to help slash Greece’s budget deficit, which, at 12.7%, is more than four times the EU’s ceiling of 3% of GDP. The kiwi declined from 51.18 to 51.07 euro cents  cents on Friday in New York.  

“There’s going to be a lot of news on Greece this week with EU finance ministers are meeting in the next two days,” said Darren Gibbs, chief economist at Deutsche Bank. “They aren’t giving much away though and are playing their cards close to their chests about what support will be given to Greece.”  

Gibbs predicts the kiwi will trade between 68 US cents and 70.50 cents with a bias towards the downside as a gloomy outlook pervades while markets are relatively thin with the US on holiday today and China out for half the week with its New Year celebrations.

The kiwi dropped to 69.57 cents from 69.75 cents on Friday in New York.  The People’s Bank of China sapped some investors’ appetite for risk after it raised its reserve ratio requirement another 50 basis points as it seeks to keep a lid on credit expansion.  

“The Chinese surprised markets on the tightening again as they target inflation,” said Robin Clements, economist at UBS. Clements predicts the currency will probably head lower this week.  

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the kiwi will follow equity markets this week with light data flows in Australia and New Zealand, and he would be looking to sell on rallies above 70 US cents.

He picks the kiwi will trade between 68 US cents and 70.50 cents, with the release of the Reserve Bank of Australia’s minutes tomorrow, and the Federal Open Market Committee’s minutes on Thursday as the main event risks this week.  

Recent data has shown New Zealand’s economic recovery has faltered somewhat, with muted consumer spending through the Christmas period, and a softer housing market giving Reserve Bank Governor Alan Bollard room to hold off raising interest rates until later than anticipated.

Markets are pricing in 163 basis points of rate hikes in the coming 12 months, according to the Overnight Index Swap curve.  

Khoon Goh, senior markets economist at ANZ National Bank, said the recent data in Australia and New Zealand shows a clear divergence between the trans-Tasman economies.  

“The Aussie currency has quite clearly outperforming” the kiwi, and Goh predicts this will continue through the week.

The kiwi dropped to 78.37 Australian cents from 78.48 cents on Friday in New York.  

CBA’s Kelleher said the kiwi looked “heavy” against its trans-Tasman counterpart and would probably be the focus this week.  

Four of the seven strategists surveyed predict the currency will fall on a trade-weighted basis amid a weaker outlook against the greenback and Australian dollar. The kiwi slipped to 64.53 on the trade-weighted index, or TWI, a measure of the currency against a basket of the greenback, euro, Australian dollar, yen and pound, from 64.68 on Friday in New York.  

Derek Rankin, director at Rankin Treasury Advisory, said the kiwi has come under pressure against the yen in recent weeks as risk was taken out of the markets. He expects the kiwi to trade in a range this week with an upside bias. The kiwi dropped to 62.57 yen from 62.89 yen on Friday in New York, while it was little changed at 44.36 pence from 44.38 pence.  

On the radar this week locally is the ANZ Roy Morgan survey of consumer confidence, along with earnings season for companies listed on the stock exchange.

In the US there’s a flood of second-tier data, though the one to watch will be America’s consumer price index on Friday.

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