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NZ Dollar Outlook: Goldman Sachs charges hang over kiwi ahead of CPI data

Monday 19th April 2010

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The New Zealand dollar will be at the whim of equity markets this week as traders wait on the fall-out from the fraud charges levelled at investment bank Goldman Sachs Group, rather than tomorrow’s local consumer price index data.

Six of seven economists and strategists surveyed by BusinessWire predict the kiwi will trade in a range against the greenback this week after the US Securities and Exchange Commission alleged Goldman Sachs failed to disclose securities it sold that were linked to the sub-prime market were chosen by a hedge fund manager who then bet their value would drop.

The Dollar Index, a measure of the greenback against a basket of six currencies, climbed 0.4% as investors eschewed higher yielding, riskier assets. 

The Chicago Board Options Exchange’s Volatility Index, or VIX, commonly known as Wall Street’s ‘fear gauge’, surged 16% on Friday in New York.

The kiwi slumped to 70.74 cents from 71.47 cents, and sank to 65.05 yen from 66.26 yen.  

“No-one was expecting it (the Goldman charges) – the moment it hit the newswires, pretty much across the board, everyone was running for cover,” said Khoon Goh, senior markets economist at ANZ New Zealand. “This was a classic financial market reaction.”  

Goh said the currency will probably trade in familiar ranges this week while the future of the US banking sector remains uncertain.

That will offset any support for the kiwi from a bigger than expected consumer price index number, which would see investors reassess their expectations for when the Reserve Bank of New Zealand will start hiking the official cash rate.  

New Zealand’s first-quarter CPI rose 0.6%, according to a Reuters survey, led by rising fuel and food prices.

That’s more than the central bank’s 0.3% projection for the three months ended March 31.  

Mike Jones, strategist at Bank of New Zealand, said a strong result might cause a “knee-jerk reaction” supporting the kiwi dollar, though he said the central bank focuses on medium-term inflation, and probably wouldn’t be swayed to change the timing of its tightening policy on the back of the data. 

Where it might have some impact is on the cross-rate with the Australian dollar, which is struggling to go below 76 Australian cents.

Investors are betting the RBNZ will hike the official cash rate by 158 basis points in the coming 12 months, according to the Overnight Index Swap curve, compared to the 81 points of rate rises that’s priced in for the Reserve Bank of Australia.  

A lot of traders have long positions on the Australian currency, where they hold it in the expectation it will appreciate in value, and ANZ’s Goh said “there’s always a risk, especially when markets are positioned heavily in one area” that an unwinding in risk appetite could help boost the kiwi against its trans-Tasman neighbour.

The kiwi edged up to 76.75 Australian cents from 76.63 cents on Friday in New York.  

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said offshore equity markets would give the currency its lead this week, with the Goldman Sachs charges sapping upbeat sentiment from better-than-expected first-quarter earnings.

About a quarter of companies on the Standard & Poor’s 500 index will report this week, including Goldman, and this will drive risk-sensitive currencies such as the kiwi.

Kelleher predicts the New Zealand dollar will trade between 69.50 US cents and 72.50 cents this week, though he said there’s good support for it at 70 cents, and strong selling opportunities at 71.50 cents.  

The kiwi will probably hold up on the crosses, which will keep the trade-weighted index range-bound this week, according to all seven strategists surveyed by BusinessWire.  

The kiwi dropped to 52.42 euro cents from 52.76 cents on Friday in New York, and inched down to 46.22 pence from 46.24 pence.  

On the local data radar this week is the ANZ Roy Morgan consumer confidence survey on Thursday, and the March migration data on Friday, while AMP Capital Investors will hold its quarterly briefing on how its analysts view the economy tomorrow.

Across the Tasman, RBA Governor Glenn Stevens is giving a speech on Friday, while the minutes from the central bank’s last meeting will be released tomorrow.  

UK first-quarter gross domestic product and retail sales data come out later this week, while the election campaign will continue to be of interest to traders.

Germany’s Zew survey of business confidence tomorrow, and the prospect of Greece drawing down on the IMF/EU loans, will interest investors later this week.

Any sign of further SEC charges in the US banking sector will also keep investors nervous.

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