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NZ Dollar Outlook: Kiwi may extend gains after Jackson Hole

NZ Dollar Outlook: Kiwi may rise as equities breathe Jackson Hole sigh of relief

By Jason Krupp

Aug. 29 (BusinessDesk) - The New Zealand dollar may rise this week after Federal Reserve Chairman Ben Bernanke told a Jackson Hole summit of central bankers that the U.S. economy is still growing, giving investors more optimism to buy growth assets including stocks and the kiwi currency.

Four of the six economists and market strategists surveyed by BusinessDesk saw the kiwi gaining in line with equity markets. Two saw the kiwi trading lower as Europe's sovereign debt crisis creeps back into the headlines. The kiwi, which recently traded at 83.99 U.S cents, may trade in a range of 82.5 cents and 85 cents this week, according to the survey.

Equity markets are again seen as the main driver of currencies this week, with investor sentiment expected to be more positive now that Bernanke's speech at Jackson Hole is out of the way, and market shift their attention back on the data. Share markets experienced high levels of volatility last week in the lead up the summit, as investors took positions on whether Bernanke would out mirror last year's event and introduce the prospect of further quantitative easing.

As it transpired, Bernanke kept his policy tool kit closed, but comments that the U.S. economy is still growing and the decision to extend the September Federal Open Market Committee meeting by a day stoked speculation the Fed will attempt to restrain the greenback.

"Although Bernanke didn't provide much detail, the fact that he added a day to FOMC has the market suspecting something is up," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "Speculation of further support from the Fed will keep the U.S. dollar down and kiwi and equities up."

That improved sentiment could run into troubled waters later in the week, when the U.S. Institute for Supply Management survey and non-farm payrolls numbers for July are released. The U.S. economy may have added 67,000 jobs in the month, and manufacturing activity is seen as slipping into contraction, according to estimates compiled by Bloomberg.

"ISM and payrolls are very influential data points, and we see downside risk to both of those this week," said Jo Capurso, a currency strategist at Commonwealth Bank Australia.

Europe's sovereign debt crisis is again threatening to dominate headlines this week, amid reports that German chancellor Angela Merkel may not have enough political support in the Bundestag to secure backing for the European Financial Stability Fund, a 440 billion euro facility designed to prevent heavily indebted member states from collapsing under the weight of their debt.

"In spite of all this we're not seeing euro decline significantly," said Derek Rankin, a director at Rankin Treasury Advisory Ltd. "The problem is that larger investor countries and other sovereign states are overweight on U.S. dollars and there's nowhere for them to go but the euro."

On the local data front, the market will be watching for the National Bank Business Outlook survey for August, which is expected to show further improvement although the numbers are seen as having limited impact on the currency.

The kiwi is likely to remain locked in its recent range of 78 Australian cents and 80.50 cents this week, according to the poll, with the attention fixed offshore.

The cross rate is likely to see further movements next week when the Reserve Bank of Australia meets on interest rates next week. The market is currently pricing in 124 basis points of cuts in the next 12-months.

(BusinessDesk)

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