NZ Dollar Outlook: Kiwi may remain range-bound as MPS looms

NZ Dollar Outlook: Kiwi may remain range-bound as MPS looms

By Jason Krupp

The New Zealand dollar is expected to remain range bound this week, with the ongoing weakness in the greenback likely to support the currency and the Reserve Bank’s Monetary Policy Statement on Thursday expected to express concern about the high kiwi.

Four of the six market strategists and economists surveyed by BusinessDesk said they expected the kiwi will to either remain stable or edge lower in the week, while two are expecting the momentum from a weakening U.S. dollar to push the currency higher.

Kiwi dollar, which was recently at 81.47 cents, may trade between 80.50 cents and 82.30 cents this week, according to the consensus view.

Currency markets will primarily driven by central bank announcements this week. The Reserve Bank of Australia is expected to keep rates on hold at 4.75% when it meets this afternoon, with New Zealand expected to follow suit on Thursday, keeping the official cash rate on hold at 2.5%.

Both central banks are likely to address the impact of the high currencies on the respective economies with Reserve Bank Governor Alan Bollard having previously flagged the strength of the kiwi as a hurdle to the local economic recovery.

The likelihood of the currency coming under the spotlight increased today with the release of the government's financial statements, which showed gross debt was 4.2% higher than forecast in the first 10 months of the fiscal year as the high New Zealand dollar drove up the value of derivatives and the cost to hedge their risk.

Gross debt was $71.6 billion for the 10 months ended April 30, which was $2.9 billion more than forecast, and up a whopping $19.6 billion from the same period last year. The jump in debt meant finance costs surged by $559 million.

"The currency, at these levels, is unhelpful to the rebalancing of the economy, although the RBNZ is a long way from intervening," said Philip Borkin, an economist at Goldman Sachs & Partners. "They have to come to terms with the fact that they can jawbone all they like, it's not going to have a major influence."

He said any downward movements by the kiwi on the back of Reserve Bank comments are expected to be capped by ongoing U.S. dollar weakness.

Fresh fears around the pace of economic recovery in the world's biggest economy have emerged after non-fall payroll data for May came in notably weaker-than-expected.

The data, which was released after the close of the New Zealand market on Friday showed the U.S. economy added 54,000 job in May, short of the 170,000 expected and down from 232,000 in the previous month. The saw the U.S. Dollar Index, a measure of the greenback against a basket of six major currencies, pare recent gains to trade near historic lows of 74.01.

Fears around the U.S. economy have also been highlighted with the Federal Reserve's $600 billion asset purchase programme set to wind down at the end of June, with market participants starting to speculate what impact the removal will have.

"I don't think the Fed will come to the market with QE3," said Mike Jones, a market strategist at Bank of New Zealand. Fed Chairman Ben "Bernanke made it clear after the last FOMC meeting that the risks of quantitative easing outweighed the benefits."

That is likely to put the release of the Beige Book on Wednesday sharply into focus, as markets search for an accurate read on the U.S. recovery. The book provides an anecdotal measure of economic conditions from each of the 12 Federal Reserve districts and is released two weeks before the monetary policy meetings of the Federal Open Market Committee.

The U.S. dollar is also expected to come under further pressure this week when the European Central Bank meets on Thursday, with inflation pressures in the core euro zone countries likely to push sovereign debt concerns to the sidelines for the time being.

The bank is expected to keep rates on hold at 1.25%, but speculation has started to emerge it could start to tighten policy in July, according to a Reuters report. That is in stark contrast to the U.S. where Bernanke has signaled that interest rates will remain near zero until there is an appreciable pickup in employment.

"The euro is caught in a tug of war with the ongoing Greek crisis and U.S. dollar yield differential," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "With the ECB expected to hike, the euro looks set to keep going up and ignore the sovereign debt crisis."

The Bank of England is set to keep its Current Bank Rate at 0.5%.

(BusinessDesk)

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