Dollar Outlook: Kiwi faces heavy start to 2011 against greenback

Photo / Martin Sykes

The New Zealand dollar faces downward pressure in its first full week of trading in 2011 as support for the greenback is bolstered by upbeat US data and renewed fears about the state of Europe's sovereign indebtedness.

Four of five economists and strategists in a BusinessDesk survey have a downward bias for the kiwi dollar this week. Just one was neutral on the kiwi, though he held an upward bias.

US non-farm payrolls grew 103,000 last month, falling short of the 150,000 extra jobs expected by analysts, but bringing down the unemployment rate 0.4 percentage points to 9.4 per cent.

Federal Reserve chairman Ben Bernanke was also a little more optimistic about the state of the world's biggest economy, though he told a Senate committee that it will probably be another four or five years before the labour market recovers.

"The Fed is still a long way away from tightening (monetary policy), but it's a little closer than a few months ago," said Darren Gibbs, chief economist at Deutsche Bank NZ. "We're looking at a lower kiwi against the US dollar this week," with American data likely to paint a better picture of the US economy, he said.

Gibbs expects the kiwi will trade between 75 US cents and 76.50 cents this week. It rose to 75.92 US cents from 75.77 cents on Friday in New York.

The kiwi touched a five-year high against the euro during Friday trading in the Northern Hemisphere, as European sovereign debt raised its head amid speculation Portugal will have to tap the International Monetary Fund for assistance to meet its spending programme.

Portugal, Spain and Italy are hitting the market for funding this week. The kiwi climbed to 58.87 euro cents from 58.32 cents on Friday in New York, and fell to 48.55 pence from 49.07 pence.

Alex Sinton, senior dealer at ANZ New Zealand, said Portugal's debt profile is "awful" and will dampen support for the euro, especially as Portugal is facing "lots of total debt issued under one year."

The New Zealand Institute of Economic Research's quarterly survey of business opinion, one of three key data points followed closely by the Reserve Bank, comes out tomorrow, and will probably be rosier than previous releases.

Business confidence has been flat in recent months according to bank surveys, and Deutsche Bank's Gibbs said the NZIER report will be coming from a low base.

Australian employment data will be in focus for investors this week, as New Zealand's closest neighbour continues to contend with major flooding in Queensland. The kiwi was little changed at 76.30 Australian cents from 76.28 cents on Friday in New York.

All five strategists surveyed were neutral on the kiwi on a trade-weighted basis, with the weak euro propping up the New Zealand dollar against a basket of currencies.

The kiwi climbed to 69 on the trade-weighted index from 68.81 on Friday in New York, and it slipped to 63.07 yen from 63.27 yen. On the data radar this week will be local building consents data tomorrow, and electronic cards spending and commodity prices on Thursday.

The European Central Bank and Bank of England meet later this week, and investors will be keen to see how the region plans to cope with its debt crisis. American inflation, manufacturing, and confidence data will be followed by traders, as will the Fed's update on the economy.