Kiwi dollar tipped to gain as equity markets recover

Photo / Martin Sykes

The New Zealand dollar may rise this week, as equity markets recover from a three-week selloff following the US credit rating downgrade, although the risk of further volatility remains high with European policymakers scheduled to meet on the ongoing debt crisis.

Five of the six economists and market strategists polled by BusinessDesk saw the kiwi gaining, as investors being returning to equities as fleeing for safe-haven assets following last week's rout. One saw the currency gaining initially but closing the week lower amid weaker US economic data.

The kiwi recently traded at 83.65 US cents, and may trade between a median range of 82.03 US cents and 84.80 cents this week, according to the poll.

Risk appetite will again be the biggest driver of currency markets in the first part of the week, economists said, as investors look to return to equities after they were heavily sold down in the wake of the US credit rating downgrade by Standard & Poor's. The move back into equities is seen as supportive of growth currencies such as the kiwi and Australian dollar.

Evidence of the shift back into risk assets was already seen in the US and Europe last week, where equities snapped their biggest streak of declines since the global financial crisis, with the Standard & Poor's 500 Index closing 0.5 per cent up on Friday at 1178.81, and Europe's Stoxx 600 Index rising 3 per cent to 237.49.

"Enough time has passed since the US downgrade has occurred for people to absorb the implications and take a longer term view in their models," said Kymberley Martin, a markets strategist at Bank of New Zealand. "It will certainly be a volatile week but not as extreme as weve seen recently."

Currency markets will also be focusing on Europe this week, when French and German officials meet on Wednesday to hammer out details of a euro zone policy response to the ongoing sovereign debt crisis that looks poised to engulf Italy and Spain.

So far the European Central Bank had borne the bulk of the heavy lifting required to keep peripheral euro zone states from defaulting on their debt repayments through its bond buying programme.

However markets are now looking on the European Union to implement a more permanent solution through the European Financial Stability Fund, a special purpose vehicle designed to provide assistance to member states in economic difficulty.

A failure to deliver on these expectations is likely to see the euro fall sharply and drag risk appetites with it, economists said, although policymakers will be aware of the downside risks following the sell on equity markets triggered when the ECB said it would not include Spanish and Italian debt in its bond buying programme - a move it quickly recanted.

"They've built the gun already, the ESFS, but it's got no bullets at the moment," said Derek Rankin, a director at Rankin Treasury Advisory Ltd. "They need to pump a serious amount of money into so that investors can be comforted and begin buying European bonds with confidence."

US economic data is expected to hog the spotlight in the latter half of the week, with a raft of housing data due on Wednesday morning, followed by Producer Price and Consumer Price Index data for July, and the Philadelphia Fed's Business Outlook Survey for August on Thursday.

"Everyone expects the data to continue to print weak and entrench the thinking that the US economy is slowing," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

The Reserve Bank of Australia is scheduled to release the minutes from its August meeting tomorrow, which the market will be sifting through for hints on when the central bank is likely to cut interest rates. Already, 133 basis points of cut are priced in over the next 12-months according to the Overnight Index Swap curve.

Any signs of dovishness by the RBA will likely see the kiwi gain against the Australian dollar, economists said, although they warned that rising inflationary pressures and the weaker Australian dollar are likely to slow moves to ease rates.

New Zealand data is mostly of second tier nature this week, with the Producer Price Index and Capital Goods Index data for the June quarter being released on Wednesday.

Fonterra's GlobalDairyTrade auction will be the local highlight of the week, with markets on the lookout for further price declines.

The average price per metric tonne of milk powder slipped 1.3 per cent at the last auction to US$3,716, tracking a broader decline in global commodity prices.

On Friday, international travel and migration as well as credit card billings data for July is due.