Dollar outlook: Kiwi may gain on Europe optimism

The New Zealand dollar may gain this week following National’s election victory and amid optimism Europe will make progress in containing its debt crisis. Photo / The Listener

The New Zealand dollar may gain this week following National's election victory and amid optimism Europe will make progress in containing its debt crisis.

The kiwi dollar traded recently at 74.90 US cents, up from 74.18 cents in late New York trading on Friday. That's right in the middle of the currency's forecast range for this week of 71.5 cents and 77 cents, according to a BusinessDesk survey of six analysts. Three called the kiwi higher, one unchanged and two saw it declining.

The kiwi may extend its gains early in the week as investors react positively to the National Party's return to power, with its largest majority in 60 years, and amid reports of an International Monetary Fund bailout for Italy.

The euro climbed after the Italian newspaper, La Stampa, said the IMF is preparing a 600 billion euro loan for Italy, Bloomberg reported.

The newspaper didn't say where it got the information but the news boosted optimism in currency markets, with the euro also gaining.

Peter Cavanagh at Bancorp, said the high kiwi dollar reflects a combination of the positive election outcome, which may be a short-term gain, and rumours of the Italy bailout.

A bailout "would be fantastic but the question is, where are they going to get the money from?" he said.

Analysts told BusinessDesk they expect the dark clouds in Europe to continue, as several European Union members prepare to auction government debt this week.

The appetite of investors to buy sovereign debt in Europe will be critical in determining the mood of financial markets. France, Britain, Italy, Belgium and Spain are holding debt sales this week, which will provide fresh clues on investors' confidence in the ability of the region to get their fiscal mess under control.

Bond yields have also jumped, lifting the cost for sovereign borrowing as Belgium became the latest state to have its credit rating cut. On Friday Standard & Poor's downgraded Belgium's credit rating to AA from AA+.

The cut followed Hungary's downgrade to Ba1 by Moody's and Portugal's which was cut to BB+, below investment grade, from BBB- by S&P.

The proposed bilateral agreement put forward by France and Germany will hopefully pave the way for a greater role for the European Central Bank, though "details remain light," said Mike Jones, market strategist at Bank of New Zealand. Europe will continue to dominate the headlines, especially since the release of local data remains second tier, he said.

Locally, the National Bank Business Outlook survey will be released today, followed by Statistics New Zealand building consents on Wednesday and Overseas Trade Indexes (volumes and prices) for the third quarter on Thursday.

US economic data set for release this week includes new home sales and the S&P/Case-Shiller home process index, and consumer confidence.

In Europe, investors will be watching British Finance Minister George Osborne's autumn spending statement tomorrow and the government's independent fiscal watchdog, the Office for Budget Responsibility, is expected to cut its forecasts for growth.