Dollar Outlook: Kiwi rally may run out of puff

The New Zealand dollar's 45 per cent rally in the past six months may falter amid speculation higher-yielding currencies and equity markets have run too hard, stretching valuations.

Five of eight economists and strategists in a BusinessWire survey predict the kiwi dollar will trade in its current range this week, after outperforming since its sub-50 US cents low in March.

The three remaining analysts have a neutral outlook on the currency, but lean towards the downside.

Investors piled into higher-yielding, or riskier, assets when the prospect of a global depression dimmed amid extraordinary fiscal and monetary measures by policy makers worldwide.

The kiwi dollar has been a favourite for the carry trade, with its fortunes rising on upbeat economic data and rallying equity markets. It recently traded at 72 US cents from 71.90 cents on Friday in New York.

"Fundamentally, the economy is looking pretty damn good," said Imre Speizer, markets strategist at Westpac. Still, "there are more signals that the rally since February/March is fairly ripe and heading for a correction."

Speizer has a neutral outlook with a negative bias on the currency this week, and expects the kiwi to ease if it closes below 71.60 US cents in the New York trading session.

The key domestic data release this week is the National Bank Business Outlook, a survey of firms' expectations around the economy that has a close correlation with the Quarterly Survey of Business Opinion followed by the central bank.

Economists predict it will continue to show improving confidence.

Robin Clements, economist at UBS NZ, said the market is "looking for an excuse to sell the currency," but the currency will probably remain range-bound this week as stronger economic sentiment boosts the kiwi dollar's fortunes.

"Business confidence is likely to keep improving, which should be supportive of the kiwi," Clements said.

The main driver of the currency this week will be a slew of data from the US and Europe, in particular the latest non-farm payroll numbers in America.

The jobless rate in the world's largest economy probably climbed to a 26-year-high 9.8 per cent this month, from 9.7 per cent in August, according to a Bloomberg survey.

The number of Americans seeking unemployment benefits fell to a two-month low, according to the Labor Department. The number of claims unexpectedly declined to 530,000 from 551,000 in the previous week.

The other major data release from the US that could influence the kiwi is September's ISM manufacturing index out on Thursday in America, according to Deutsche Bank chief economist Darren Gibbs.

The market predicts the index will rise to 54 from 52.9 the previous month, and Gibbs said it may reduce appetite for risk down if it comes in weaker than expected. He predicts the kiwi will trade between 71 US cents and 73 cents this week.

Reserve Bank of Australia Governor Stevens told the Senate today that normal policy settings should resume once the "recovery phase" is in place, and that rates will be hiked "ahead of a build-up of imbalances that would occur if interest rates were kept low for too long."

The kiwi dollar rose to 83.16 Australian cents from 82.76 cents on Friday in New York. Australia is New Zealand's biggest trading partner.

Stevens' opening statement to Australian policy makers follows comments from Federal Reserve Governor Kevin Warsh, who said a policy turnaround in the US could be greater than usual due to the pick-up in the world's largest economy.

Six of eight strategists in the BusinessWire survey predict the currency will stay in a range on a trade-weighted basis. One predicts it has a bias towards declining, and one other expects it to fall.

The currency was little changed at 65.59 on the trade-weighted index, a measure of the kiwi against the Australian dollar, greenback, yen, euro and pound, from 65.55 on Friday in New York.

Japan's Finance Minister Hirohisa Fujii told reporters at the Group of 20 Nations leaders' summit in Pittsburgh that his government was comfortable with the yen's strength, and wouldn't intervene in the currency.

At the same time, Japanese fund managers are repatriating their money as the September quarter comes to a close and they prepare to reassess their positioning.

The kiwi sank to 64.05 yen from 65.09 yen on Friday in New York.

The pound has extended its losses after Bank of England Governor Mervyn King last week announced he was happy with a weaker currency stoking demand for British exports.

The kiwi climbed to a new 13-year high of 45.37 pence from 44.88 pence on Friday in New York, and edged higher to 49.05 euro cents from 48.97 cents. The Australian dollar advanced to 54.50 pence from 54.22 pence.

The major data releases this week include second quarter gross domestic product data from the US and the U.K., and the European Commission's consumer and economic confidence surveys.

Locally, Statistics New Zealand will release new building permits for August on Tuesday, while Australia's retail sales for last month come out on Wednesday.

-BUSINESSWIRE