Tuesday, August 24, 2010

Kiwi dollar tipped to weaken on Aust election drama

The New Zealand dollar may fall below 70 US cents this week as investors wait on the outcome of Australia's Federal election, which failed to deliver a clear result.

Five of seven economists and strategists in a BusinessDesk survey were downbeat on the currency this week after Saturday's election raised the prospect of a hamstrung executive.

Neither the reigning Labor Party nor the Liberal Coalition secured a majority.

The two remaining strategists are picking the kiwi will trade in a range this week.

Initial market reaction was to push the kiwi higher to 70.57 US cents from 70.25 cents on Friday in New York, and it gained to 79.44 Australian cents from 79.16 cents as investors eschewed the so-called 'lucky country' in favour of New Zealand amid the uncertainty over the election.

However, currency strategists don't expect this trend to hold.

"The kiwi's going with it (the Australian dollar) to some extent, and this could be the catalyst to break 70 US cents,"said Imre Speizer, markets strategist at Westpac Bank.

"It's going to be a volatile week with weakness hovering over the Aussie."

Speizer predicts the kiwi will fall against the greenback this week as a general downbeat tone among investors keeps them shying away from yields on offer in Australia and New Zealand.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, forecasts the New Zealand currency to make a "gradual drift off" towards 69 US cents, though the kiwi will get some early support as investors jump out of Australia and into New Zealand.

Central bankers from around the world will gather in Jackson Hole in Wyoming in the annual Federal Reserve forum on Thursday.

Fed chairman Ben Bernanke's keynote address on Friday will be watched with interest by market-makers.

The local data calendar is almost bare, with the Reserve Bank's survey of inflation expectations the only release of note, though it's unlikely to be market-moving.

Mike Jones, strategist at Bank of New Zealand, said the two-year expectation will be one to watch, and any prediction above 3 per cent, which is outside the central bank's target band, could see the kiwi rally as investors boost their pricing for an interest rate hike.

Investors have been paring back their forecast track for the official cash rate as the economy cooled down, and they're picking 54 basis points of hikes over the next year, according to the Overnight Index Swap curve.

Nervous investors are still waiting to see what comes, if anything, of a proposed meeting between Japan's Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa.

The yen's strength has been a cause of concern, and markets have been chattering that the central bank is poised to intervene.

Khoon Goh, ANZ New Zealand head of market economics and strategy, said the Bank of Japan would need a coordinated approach for intervention to succeed, and with most countries wanting to devalue their currencies, the bank can't intervene successfully.

The kiwi climbed to 60.45 yen from 60.03 yen on Friday in New York. The seven strategists surveyed by BusinessDesk are more divided on where the currency will go on a trade-weighted basis, with four having a negative bias, though only one is calling an outright decline, and three expecting it to go sideways this week.

The kiwi rose to 66.32 on the TWI from 65.91 last week.

European Central Bank council member Axel Weber told Bloomberg TV that Europe needs to keep its stimulus in place until the end of the year, wiping any upbeat sentiment investors have about the state of the region, while sovereign debt continues to plague Europe's outlook.

BNZ's Jones said credit default swap spreads widened last week, and the region's sovereign debt is still a concern for the market. The kiwi climbed to 55.56 euro cents from 55.26 cents on Friday in New York, and was little changed at 45.35 pence from 45.27 pence.

On the radar this week is American housing data and the Richmond Federal Reserve's manufacturing index. An estimate of second-quarter growth in the US Germany's IFO survey will also come under scrutiny as Europe's biggest economy continues to bear the brunt of the region's recovery.

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