NZ dollar outlook: Kiwi may gain as equity markets recover
By Jason Krupp
Aug. 15 (BusinessDesk) - The New Zealand dollar may rise this week, as equity markets recover from a three-week selloff
following the U.S. 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 U.S. economic data.
The kiwi recently traded at 83.65 U.S. cents, and may trade between a median range of 82.03 U.S. 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 U.S. 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 U.S. 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% up on Friday at 1178.81, and Europe's Stoxx 600 Index rising 3% to 237.49.
"Enough time has passed since the U.S. 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 we’ve 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."
U.S. 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 U.S. 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 Co-Operative Group'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% 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.
(BusinessDesk)