Kiwi dollar may fall as Christchurch earthquake costs become known

Photo / Martin Sykes

The New Zealand dollar may extend its losses this week as the cost of the Christchurch earthquake becomes clearer.

Four of seven economists and strategists surveyed by BusinessDesk expect the kiwi dollar to come under further pressure this week as the fiscal cost of the Christchurch quake becomes more apparent, and puts pressure on the central bank to hike interest rates when it meets next week.

Two strategists predict the currency will trade in a range this week, while the last expects it to claw back some of its recent losses.

The kiwi was little changed at 75.12 US cents from 75.19 cents on Friday in New York, having tumbled since the quake on February 22. The cost of the disaster, which has killed at least 148 people, is tentatively being put at more than $12 billion, and Prime Minister John Key has already indicated it will weigh on this year's budget.

"We're going to get a little more clarity on the cost of the earthquake, and the government is expected to come out with its emergency response package today," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "The kiwi is probably going to be range trading, but to the down-side."

The prospect of a slowing Chinese economy will probably add downwards pressure to the kiwi this week. Chinese Premier Wen Jiabao told Xinhua News Agency the world's second-biggest economy will trade-off "unsustainable" economic development to curb food price inflation, crack down on government corruption, and reduce social inequality.

Goh said the downgrade to growth "will be taken by the market as a negative - particularly for the Aussie dollar, which has been used as a proxy to invest in China, and will provide a drag on the kiwi as well."

The move by China's Wen is being seen as a means to head off any political unrest as the Middle East and North Africa undergo major turmoil amid rising food prices and high unemployment.

That's seen the Egyptian and Tunisian administrations toppled and has sparked major violence in Libya.

The rising price of food has helped underpin demand for the New Zealand dollar, as investors look for nations that are able to feed themselves and others.

Ongoing strength in the price of locally produced materials may help the kiwi dollar claw back some of last week's losses, with Fonterra's online auction and the ANZ Commodity Prix Index out this week.

Derek Rankin, director at Rankin Treasury Advisory, said the strong commodity story should discourage the Reserve Bank from cutting rates after the quake.

Traders are betting the official cash rate will fall by 8 basis points over the coming 12 months, according to the Overnight Index Swap curve, down from the 50 points of hikes priced in before last Tuesday's disaster.

"Cutting rates by half a per cent might be seen as an overreaction - there are a lot of variables for the Reserve Bank to think about," Rankin said

The Reserve Bank of Australia meets tomorrow, and is expected to keep the overnight target cash rate at 4.75 per cent. Traders are betting the RBA will lift rates by 25 basis points over the coming

12 months, according to the Overnight Index Swap curve. The kiwi fell to 73.92 US cents from 74.24 cents yesterday, and may extend its decline against its trans-Tasman neighbour.

Imre Speizer, market strategist at Westpac Bank, said the kiwi could drop to a fresh 10-year low as the divergence between the two nations' interest rate markets continues amid speculation the RBNZ will cut the OCR.

Five of seven strategists surveyed expect the kiwi will fall on a trade-weighted basis, with the heightened fears of a civil war in Libya taking its toll on investors' appetite for riskier, or higher-yielding, assets.

The kiwi was little changed at 66.47 on the trade-weighted index of major trading partners' currencies from 66.50 on Friday in New York, and fell to 61.37 yen from 61.60 yen. It rose to 54.60 euro cents from 54.41 cents last week, and was little changed at 46.65 pence from 46.59 pence.

On the data radar this week is US non-farm payrolls on Friday, while today's Chicago PMI and a speech from Federal Reserve chairman Ben Bernanke later in the week will also be watched.

Investors will target tomorrow's Chinese PMI for a sense as to where the world's second biggest economy is heading, while New Zealand's terms of trade tomorrow and the National Bank Business Outlook will largely be ignored.