Dollar outlook: Kiwi may fall as more QE unlikely for Fed

Monday 20th September 2010

The New Zealand dollar will likely fall this week with the Federal Reserve expected to shoot down rumours it’s planning to expand its asset purchase programme this week, while local data is expected to show New Zealand’s economic recovery is faltering.

Five of eight economists and strategists in a BusinessDesk survey predict the currency will decline this week, with the Federal Open Market Committee expected to hold its dovish view on the US recovery. One strategist is neutral with a negative bias and another said the currency is finely placed and could go either way. The last expects the kiwi to stay in a range this week.

The kiwi dropped near a two-week low to 72.60 US cents from 73.22 cents on Friday in New York as weaker American consumer confidence data added to downbeat investor sentiment amid reports Ireland may have to tap the International Monetary Fund for cash to bail out its lenders. Though the reports were denied, they kept risk-sensitive currencies on the back foot as Irish 10-year bond spreads above German bunds rose to record highs.

The FOMC meets this week and is expected to keep interest rates near zero and leave its quantitative easing programme unchanged amid speculation it’s planning to expand its asset purchases.

“I don’t expect the Fed statement will flag that,” said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

“The outlook needs to deteriorate significantly, and we expect the Fed to hold the line.”

Goh has a negative bias to the kiwi dollar, with the Fed meeting and local economic data hanging over the currency this week.

New Zealand’s gross domestic product grew 0.8% in the three months ended June 30, up from a 0.6% pace in the first quarter, according to a Reuters survey of 14 economists. That’s below the 0.9% expansion forecast by the Reserve Bank, which has pared back its forecast track of interest rate hikes by more than a percentage point over the coming few years.

In a separate survey, economists said they expect the current account deficit rose to 2.8% of GDP in the second quarter from a 21-year low 2.4% in the first quarter.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the economic data will be put in context by the shocks to the South Island over the past few weeks, with the collapse of finance company South Canterbury Finance, the Canterbury earthquake and the recent snow dump likely to have curbed dairy production.

Kelleher said he will be selling on rallies this week, and predicts the currency will trade in a range of between 71.50 US cents and 73.50 cents.

Also weighing on the currency this week will be Fonterra Cooperative Group’s annual result, and the world’s biggest exporter of dairy products is expected to make another update on the pay-out to farmers. In August, Fonterra held its forecast at $6.60 per kilogram of milk solids.

Reserve Bank of Australia Governor Glenn Stevens will deliver a speech in Victoria entitled ‘Monetary Policy and the Regions’, and is unlikely to make any changes in his stance. Markets are giving a rate hike in October a one-in-four chance when the RBA meets next month. The kiwi rose to 77.46 Australian cents from 77.32 cents on Friday in New York.

Mike Jones, strategist at Bank of New Zealand, said the kiwi may fall below 77 Australian cents this week with the Governor’s speech today and tomorrow’s release of last month’s board meeting minutes expected to keep investors optimistic on a rate hike next month.

Derek Rankin, director at Rankin Treasury Advisory, said European sovereign debt issues will be worth watching after the Irish reports on Friday, while Spain, Portugal and Greece will be holding auctions for government bonds on Tuesday.

“Europe still has the capacity to shock the world,” Rankin said.

“Sovereign issues are a problem, with sovereign credit issues bubbling in the back ground – they haven’t gone away and could be a driver in the market this week.”

The kiwi was unchanged at 55.67 euro cents from Friday in New York, while it fell to 46.41 pence from 46.58 pence last week.

Six of eight strategists surveyed were negative or had a downbeat bias for the kiwi on a trade-weighted basis, while the other two were neutral on the cross-rates. The kiwi dropped to 66.89 on the TWI from 67.15 last week, and declined to 62.23 yen from 62.81 yen.

CBA’s Kelleher said the yen cross rate will be worth watching, after Japan’s Ministry of Finance intervened in the currency last week. The action, which is unilateral, will pit the Japan’s government against China, which has been buying Japanese bonds in lieu of US Treasuries in recent months.

On the data radar this week is August migration and tourism data tomorrow, which along with today’s consumer confidence survey, are likely to add to the glum outlook for the local economy.

American housing data this week is expected to start showing signs of improvement after nearing the bottom of the trough. Germany’s IFO survey on Friday will give a snapshot of the health of Europe’s economy when it’s released.

Businesswire.co.nz

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