NZ Dollar Outlook: Kiwi may extend decline as Europe's debt woes worsen

Monday 26th September 2011

The New Zealand dollar may extend its decline this week as investors, nervous about the slow progress being made on Europe's escalating sovereign debt crisis, sell growth-linked currencies for the relative safety of the greenback.

Three of the seven economists and market strategists surveyed by BusinessDesk saw the kiwi falling amid further bad news out of Europe, while two saw the currency gaining from oversold levels. Two said the volatility was too great to pick a bias.

The kiwi, which was recently at 77.67 U.S cents, may trade in a range of 76 cents and 79 cents this week, according to the poll.

Currency markets are likely to be predominantly driven by European headlines this week as investors become increasingly nervous that policymakers lack the political capital to tackle the debt crisis head on.

Increased pressure from the World Bank, Group of 20 nations, and the International Monetary Fund over the weekend to put together a credible solution produced mixed results.

European officials launched a three pronged plan to ring fence a Greek default from triggering a run on the region’s banks by expanding the power of the European Financial Stability Fund.

However, little progress was made on increasing the size of the fund, with German Finance Minister Wolfgang Schäuble again refusing to discuss leveraging the EFSF to increase its impact, saying nothing would be achieved by "throwing - literally - even more money at the problem".

While the statements from policymakers left room for speculation, what was crystalised in the minds of investors is that euro zone is preparing for a Greek default.

"In the short term you've got to respect the trend that is in place, and expect further downside moves," said Nick Tvedt, a corporate FX dealer at HiFX. "Certainly the news that holders of Greek debt might have to take big haircut will only be viewed as a negative."

While concerns over Europe look to dominate the currency for the week, the kiwi may see some early technical gains as it bounces back after being sold down last week.

"Speculators are short on the euro and long on the U.S. dollar, and some of those positions have been pared back" as the European currency bounced off its lows on news of the Greek plan, said Khoon Goh, head of market economics and strategy at ANZ New Zealand. A short is a bet that an asset will fall in price, while a long is a bet it will gain.

The data flow on the week is light and expected to do little to distract from the European crisis.

On the international front, economists will be watching for U.S. consumer confidence numbers for September and U.S. growth figures for the June quarter.

Locally, the kiwi dollar largely ignored robust balance of trade figures for August, which showed the growth of New Zealand's exports continued to widen, although imports rose as well.

Statistics New Zealand reported a trade deficit of $641 million in the month, or 19% of the value of exports. That compares with an average monthly deficit for August of 27% in the previous five years.

For the year to August, the country continued to report a surplus, at $1.1 billion, compared with $873 million in the year to August 2010. Total imports were up 15% in August compared to the same month a year earlier, at $4.1 million, while exports were up 10% to $3.4 billion.

"While the deficit was larger than expected New Zealand still recorded its largest trade surplus in 17 years," said Philip Borkin, an economist at Goldman Sachs. "That's still pretty high given the backdrop."

The market will also be watching for the release of National Bank Business Outlook for September, followed by building content numbers for August, which are due at the end of the week. Both are expected to have a limited impact on the currency.

BusinessDesk.co.nz

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