NZ Dollar Outlook: Kiwi may reach 72 US cts as GDP looms, yuan reset

Monday 21st June 2010

The New Zealand dollar will likely move toward 72 US cents this week, with local data poised to show the economy is continuing to recover from its worst recession in 18 years, while Chinese officials indicated the yuan will resume its appreciation.

Five of eight economists and strategists in a BusinessWire survey predict the local currency will test 72 US cents this week, with four forecasting it will stay in a range and the rest expecting it to grind higher this week, with a stronger yuan likely to underpin support for New Zealand’s commodity prices.

The kiwi climbed above 71 US cents for the first time since May 13 after the People’s Bank of China said it will give the yuan more flexibility and reintroduce a trading band of plus or minus 0.5%, and resume the reformation of its exchange rate regime. Still, New Zealand’s dollar pared its gains after China didn’t move to appreciate the yuan today as some traders had hoped.

If the Chinese moves “filter through to higher commodity prices, there’ll be more support for the kiwi and Aussie,” said Mike Jones, strategist at Bank of New Zealand, referring to the trans-Tasman currencies colloquially. “The fix disappointed those people looking for a more rapid appreciation in the yuan.”

Jones predicts the kiwi will test 72 US cents this week, helped by a stronger yuan. The kiwi climbed to 71.33 cents from 70.28 cents on Friday in New York, and recently traded at 70.79 cents.

New Zealand’s economic recovery may have slowed in the first three months of the year, with GDP forecast to grow 0.5%, according to a Reuters survey, slower than the 0.8% pace in the fourth quarter of 2009. The data will be released on Thursday and comes as New Zealand continues to shake off the recent economic downturn.

Derek Rankin, director at Rankin Treasury Advisor., said there probably won’t be “too much to shake the markets” in what’s been a slow and steady recovery. Rankin has an upward bias on the kiwi this week.

The country’s first quarter balance of payments comes out on Wednesday, and is forecast to show the current account deficit shrank to an annual $5.07 billion from $5.5 billion, according to Reuters data, as imports were pared back amid strong returns for exporters on resilient prices for raw materials.

Robin Clements, economist at UBS New Zealand, said a current account deficit of less than 3% of GDP would be the lowest percentage level in two decades.

“In a world that increasingly is taking a dim view of government debt, a figure less than 3% would be positive for our dollar,” he said. The kiwi faces upward pressure this week, he said.

The Federal Open Market Committee will review the fed funds rate, and will likely keep to its line that interest rates will stay low for an extended period.

Still, Darren Gibbs, chief economist at Deutsche Bank, said the Fed’s announcement will be “fairly growth supportive” and should help underpin investors’ appetite for higher-yielding, or riskier, assets.

Gibbs predicts the kiwi will trade in a range of between 70 US cents and 72 cents this week.

The pound will come under scrutiny over the next couple of days with Britain’s Chancellor of the Exchequer George Osborne preparing to deliver his first budget in what will set the stage for deep spending cuts in the UK’s economy.

Though the outline has been well-signalled, Gibbs said the key will be the rating agencies’ reaction to the government’s fiscal plan. The kiwi rose to 47.78 pence from 47.41 pence on Friday in New York.

Six of eight strategists surveyed predict the kiwi will push higher on a trade-weighted basis, as the greenback stays under pressure and investors’ tolerance for risk pushes higher.

The currency increased to 67.95 on the trade-weighted index of major trading partners’ currencies from 67.59 last week, and gained to 64.25 yen from 63.24 yen. It rose to 57.19 euro cents from 56.77 cents on Friday in New York.

Data out today showed the country’s net migration shrank to an 18-month low of 250 as more people start heading across the Tasman in search of greater employment opportunities.

Australia avoided falling in to recession during the global financial crisis as Chinese demand for its raw materials propped up the nation’s economy. The kiwi fell to 80.68 Australian cents from 81.02 cents on Friday in New York.

On the data radar this week is New Zealand’s trade balance on Friday, which will probably show the country’s export receipts rose to $4.24 billion last month from $3.97 billion in April.

Germany’s IFO business survey and manufacturing data are expected to show how Europe’s biggest economy fared during the turmoil last month, when the region’s sovereign debt crisis scared investors away from stock markets and into the relative safety of government bonds.

Businesswire.co.nz

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