The New Zealand dollar will likely extend its 3.3 per cent decline this week as the Federal Reserve moves closer to tapering its bond buying programme and as pending limits on low equity mortgage lending in New Zealand dampen expectations for interest rate hikes.
The kiwi fell to a three week low of 78.02 US cents, and was at 78.29 cents at 8am in Wellington, from 78.38 cents at 5pm yesterday. The trade-weighted index weakened to 73.98 from 74.05.
Demand for New Zealand's currency is waning amid expectations the Fed will start reducing its US$85 billion a month bond buying programme from next month as the US economy improves. The looming end to the money printing programme is putting upward pressure on US interest rates and underpinning demand for the greenback. Meanwhile in New Zealand, the Reserve Bank is introducing LVR limits in a bid to dampen a house price bubble, reducing the need for an early rate hike.
"The kiwi will probably move lower which keeps the fall since about three days ago going," said Imre Speizer, senior currency strategist at Westpac Banking Corp. "We are getting closer to Fed tapering which is causing US dollar strength and the second thing driving it is the LVR restrictions which were announced this week."
Any bounce in the kiwi is likely to be capped at 79.50 US cents while there is support for the currency at 78 cents, Speizer said.
Traders tonight will be eyeing a report on US home sales after a report overnight showed US house prices rose an annual 7.2 per cent in the second quarter. A separate report overnight showed US initial jobless claims rose for the week but the average for the four weeks was the lowest since November 2007, Speizer said.
The Jackson Hole summit of central bankers this weekend has no major Fed speeches scheduled and could be a non-event for markets, Speizer said.
The New Zealand dollar fell to 86.89 Australian cents at 8am in Wellington from 87.14 at 5pm yesterday and slid to 77.26 yen from 77.02 yen. The kiwi edged down to 58.64 euro cents from 58.77 cents yesterday and was little changed at 50.25 British pence.