NZ Dollar Outlook: Kiwi to head lower

Photo / Martin Sykes

The New Zealand dollar will probably head lower this week as the prospect of rising American interest rates cuts the kiwi's appeal ahead of the Federal Open Market Committee meeting on Tuesday in the U.S.

Five of nine economists and strategists in a BusinessDesk survey expect the kiwi to fall this week as higher returns on American government bonds erode the appeal of so-called riskier assets, while strong U.S. data stokes demand for stocks on Wall Street.

Three expect the kiwi to trade in a range this week, while one predicts the currency will gain.

The yield on 10-year U.S. Treasuries rose 32 basis points last week as investors sold their bonds to get into the stock market after stronger than expected American data helped push the Standard & Poor's 500 index to its highest level since September 2008.

That bolstered appetite for the greenback, and diminished the appeal of higher-yielding assets.

The kiwi fell to 74.66 US cents from 75.03 cents on Friday in New York.

America's "QEII pricing's done nothing, with rates going up since the announcement," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional, referring colloquially to the Federal Reserve's second round of asset purchases.

"I'm not bearish on the kiwi until it goes through to 73 US cents."

Kelleher has a downside bias to the currency, and expects it to trade between 73.50 US cents and 75.50 cents this week.

The Federal Open Market Committee will review monetary policy on Tuesday in the US, and isn't expected to move on rates of its asset purchase programme.

Still, Fed Chairman Ben Bernanke may use the meeting to try and talk down interest rates.

Mike Jones, strategist at Bank of New Zealand, said US data has been relatively upbeat lately, which has helped boost investor confidence in the state of the US economy, and Bernanke could either talk up the recovery, or try and talk down rates.

Jones expects the kiwi to come under pressure this week with a weaker yield advantage over its American counterpart.

The government will lay out its half-year economic fiscal update tomorrow, which will probably be more downbeat than previous forecasts.

The government's tax take has been less than expected from corporate taxpayers, and the pick-up in consumption tax hasn't been as big as forecast after the hike in GST.

Derek Rankin, director at Rankin Treasury Advisory Ltd, said the pay-out to South Canterbury Finance Ltd. depositors under the government's guarantee and the impact of the Canterbury earthquake will keep policy-makers under pressure to make bigger spending cuts next year.

"If the government accounts are poor, the rating agencies are not going to be encouraged," Rankin said.

He expects the kiwi will trade in a range of between 74 U.S. cents and 77 cents this week.

Chris Weston, market analyst for IG Market, bucked the trend, saying the kiwi may gain this week, as investors chase returns ahead of the end of year close.

"This is the last week people can put money to work and chase alpha, so I expect to see higher volumes coming through," Weston said.

He said the influence of the greenback on the kiwi should be muted over the week, as dollar positive data such as U.S. balance of trade numbers are countered by risk positive announcements.

Commodity currencies such as the Australian and New Zealand dollars are expected to come under pressure in the week ahead amid signs China could suddenly raise interest rates to tackle its soaring inflation. Consumer price data released over the weekend showed prices had jumped 5.1 per cent in November, the highest level in 28-months.

"We're starting to get the general feeling that they are getting serious on rates," said Weston.

"The only concern that seems to be holding them back is the inflow of hot money."

The kiwi may fall against the Australian dollar this week, with softer domestic data weighing on the cross. Retail trade numbers for October are expected to come in softer, with a pullback in consumer spending in the wake of the October sales tax hike to 15 per cent from 12.5 per cent previously.

It fell to 75.90 Australian cents from 76.09 cents on Friday in New York.

The NAB business confidence survey is expected to show a decline in business sentiment when it is released towards the end of the week, according to Darren Gibbs, senior economist for Deutsche Bank.

"Some of the bad news that was missed in the previous survey might be coming through on this one, with Pike River and the drought in Northland affecting sentiment," Gibbs said.

Six of nine strategists surveyed expect the kiwi to fall on a trade-weighted basis, with the strong greenback underpinning the move. One predicted it will gain, and two were neutral on the trade-weighted index.

The kiwi fell to 67.63 on the TWI from 67.78 on Friday, and it was little changed at 62.71 yen from 62.78 yen.

It was unchanged at 56.58 euro cents and declined to 47.25 pence from 47.51 pence last week.

On the data radar this week is local retail sales tomorrow, and business and consumer confidence surveys later in the week.

Fonterra Cooperative Group's online auction on Wednesday may attract some attention after the dairy exporter raised its forecast pay-out to farmers last week.

American retail sales and housing data will also be on the radar.