Kiwi may fall as US economy, greenback back in focus

Photo / Martin Sykes

The New Zealand dollar may fall this week, after Federal Reserve board members hinted that the US economy is recovering enough to end extraordinary support measures, with figures this week expected to show America is stacking on new jobs.

Six of the seven strategists and economists surveyed by BusinessDesk expect the kiwi to decline against the US dollar this week, with the currency trading in a range of between 73.50 US cents and 76.50 cents. One economist predicted the currency will be little changed this week.

A renewed focus on US growth and the greenback may snap the kiwi dollar's rally, which pushed the currency up 2.3 per cent last week to close at 75.28 US cents. A larger-than-expected government bond sale, reinsurance flows and optimism Japan's nuclear crisis and the ongoing conflict in Libya wouldn't destabilise the global economic recovery have all helped underpin the local currency, which recently traded at 75.11 cents.

The US dollar may strengthen this week as the market begins pricing in the prospect of the US exiting its US$600 billion asset buying programme earlier than expected, after Federal Reserve Bank of Philadelphia President Charles Plosser laid out a strategy for withdrawing monetary stimulus due to the improving strength of the US recovery.

That prompted other Fed board members to follow suit, seeming to pour cold water on prospects of a third round of asset purchases while simultaneously raising the likelihood of a rate hike before the end of the year.

"We had a situation last week where the market was 96 per cent bearish on the US dollar, which is an unsustainable bias," said Tim Kelleher, head of institutional FX sales New Zealand at ASB Institutional. "So we should start to see it bounce higher."

The market will be closely watching the release of March US payroll data at the end of the week for further evidence of the recovery, with the world's biggest economy expected to have added 195,000 this month, according to the median forecast of 62 economists surveyed by Bloomberg.

Locally, markets will be looking ahead to the release of the National Bank Business Opinion survey for March for a read on New Zealand's economy.

Thursday's business confidence numbers, a key leading barometer for the economy, will reflect the impact of the February 22 quake in Christchurch and the March 11 quake and tsunami in Japan. The South Island quake prompted the Reserve Bank to slash the official cash rate by 50 basis points to 2.5 per cent in a bid to stave off a severe downturn.

"It will give us some colour as to the extent of the indirect impact the rate cut has had on the rest of New Zealand," said Robin Clements, an economist at UBS.

Further afield, currency dealers said European sovereign debt remains an issue to watch, with the results of Ireland's bank stress test due at the end of the week.

The test is seen as a key requirement as the indebted country pushes the European Central Bank to create medium-term funding for Irish banks to wean them off emergency liquidity.