Dollar outlook: Kiwi near the top of range ahead of RBNZ review

Monday 13th September 2010

The New Zealand dollar is near the top of its six-month range ahead of Thursday’s monetary policy statement, and will probably hold around its current level this week.

Six of eight economists and strategists in a BusinessDesk survey expect the currency will trade in a flat range this week, with the greatest risk coming from Reserve Bank Governor Alan Bollard’s statement on Thursday. The remaining two strategists give the kiwi an upward bias, with global optimism underpinning support for so-called risk sensitive currencies.

The kiwi climbed to 72.96 US cents from 72.52 cents on Friday in New York, paring a month high 73.24 cents, after strong Chinese data on Saturday stoked investors’ appetite for riskier, or higher-yielding, assets, and encouraged traders to bump up the New Zealand dollar. The upbeat global sentiment has eased any concerns investors might have about this week’s monetary policy statement.

The RBNZ likely to keep rates on hold for the rest of the year following a string of weak data, the biggest earthquake in more than 70 years and the collapse of the country’s second biggest finance company. Investors are pricing in just 15 basis points of rate hikes in the coming 12 months, winding down expectations by half a percentage point in local trading today, according to the Overnight Index Swap curve.

“The Reserve Bank should be dovish which would add extra weight on the kiwi, but the bullish global theme will win,” said Imre Speizer, market strategist at Westpac.

“Unless we got a surprise from the RB, the kiwi should underperform” other risk currencies, he said.

Speizer predicts the kiwi will test 73.60 US cents this week, and may try to get above 74 cents if it breaks through that, though the local outlook will temper any optimism from offshore.

Retail sales and housing data this week are expected to keep a damp mood for the prospects of New Zealand’s recovery.

The recent strength in equity markets has kept investors nervous, with September historically a weak month for riskier, or higher-yielding, assets. The Dow Jones Industrial Average has climbed 4.5% this month.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said there had been an increase in call options on the Chicago Option Board Exchange’s Volatility Index, which insures against put options on the Standard & Poor’s 500 index and is a measure of volatility in markets.

“There’s been a huge jump up on calls on the VIX – people are picking volatility in equities,” he said. Kelleher predicts the kiwi will be capped by recent ranges this week.

Fonterra Cooperative Group will hold an online auction on Wednesday in the US, and Westpac’s Speizer said if this month’s second sale pushes prices up again, the kiwi might climb on the bullish outlook for commodity prices.

The price of whole milk powder surged 19% on globalDairyTrade earlier this month as rising grain prices in Russia encouraged buyers to secure product amid fears rising costs of feed might limit supply in the future.

Concerns about the health of Europe’s sovereign debt will likely weigh on investors this week, after Hypo Real Estate Holding, the biggest bank failure in Germany since the Second World War, will get a further 40 billion euros in state guarantees to protect its restructuring efforts.

That came as central bank regulators agreed on new capital requirements for lenders at the Basel III accord. Banks will now need a capital ratio of top quality assets of 7%, rather than the 10% pushed for by American and English regulators.

The summit gave them until 2018 to phase in the new regulations. The kiwi rose to 57.24 euro cents from 57.03 cents on Friday in New York, and gained to 47.41 pence from 47.08 pence.

Mike Jones, strategist at Bank of New Zealand, expects the kiwi will gain against the euro and the pound as investors continue to shun the region.

“The big issue focus for G-7 nations is Basel IIII regulations,” Jones said.

“It will have a material impact on European banks, and they will need to raise equity to meet the new rules.”

Six of eight strategists surveyed expect the kiwi will range-trade on a trade-weighted basis, with the other two having an upward bias.

The kiwi rose to 67.69 on the TWI from 67.40 last week. Japan’s upcoming leadership election will keep the knockers on the yen, which is still around 15-year highs against the greenback at 84.24 per US dollar.

Prime Minister Naoto Kan is leading in the public polls, though the outcome is decided by party members. His challenger, Ichiro Ozawa, is known to be in favour of currency intervention, and would have implications for the yen.

The kiwi climbed to 61.47 yen from 60.66 yen last week. Australian consumer and business confidence data this week will keep investors buoyant on the Australian economy after it formed a coalition government last week.

The kiwi recently traded at 78.38 Australian cents from 78.32 cents on Friday in New York.

On the data radar this week is Germany’s Zew survey of economic sentiment today in Europe, and US retail sales and inventories tomorrow. American and Ne Zealand manufacturing data on Thursday will also be watched.

Businesswire.co.nz

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