Kiwi hot with speculators with Bollard under gun

Kiwi Favorite of Speculators With Bollard Under Rate Pressure

By Candice Zachariahs and Wes Goodman

June 3 (Bloomberg) -- Reserve Bank of New Zealand Governor Alan Bollard's desire for a weaker currency is running into resistance from some of the world's biggest bond investors.

Kokusai Asset Management Co. and Loomis Sayles & Co. expect Chinese demand for New Zealand's milk and wool to spur economic growth, leading Bollard to raise interest rates from a record low and helping the so-called kiwi rebound from its steepest drop in a year. Derivatives indicate borrowing costs will rise at least 1.5 percentage points within 12 months, about half a percentage point more than any other Group of 10 nation.

``New Zealand will benefit from the Chinese recovery,'' said Masataka Horii, who helps oversee the equivalent of $54.5 billion including Asia's biggest bond fund at Kokusai in Tokyo. ``Their economy is getting better. Overseas bondholders will be able to profit from currency appreciation.''

A stronger kiwi may be the last thing Bollard wants as he tries to steer the nation's $131 billion economy while a spreading debt crisis in Europe threatens to slow global economic growth. New Zealand's dollar has climbed 33 percent against its U.S. counterpart from last year's low in March, 38 percent versus the euro and 23 percent relative to the yen.

``A gradual depreciation of the New Zealand dollar remains desirable for a sustainable rebalancing of the New Zealand economy, as it would boost export returns and discourage household spending on imports,'' Bollard said in the central bank's Financial Stability Report on May 19.

Average daily trades in New Zealand's currency amount to about 43 percent of the nation's gross domestic product, according to Bloomberg calculations using the most recent data from the Bank of International Settlements. That's the biggest proportion among the 16 most-traded currencies, just above the level for the Swiss franc.

Trade Surplus

Bollard may not be able to avoid increasing rates, which would boost demand for the currency, following a surge in commodities and government data on May 27 showing the first annual trade surplus since 2002. ANZ National Bank Ltd.'s index of New Zealand commodity export prices climbed to a record in May, led by surging dairy costs.

Exports including milk products, wool and lumber account for 30 percent of New Zealand's economy. Chinese purchases of the nation's goods climbed almost 40 percent this year, more than from Australia, Japan, the U.S. or Germany, data from Beijing's Customs General Administration show. The world's fastest-growing major economy is New Zealand's second-largest export market after Australia and the biggest importer of its dairy products.

Rate-Rise Bets

Interest-rate swaps indicate a 78 percent chance Bollard will lift the official cash rate at the Reserve Bank's next meeting on June 10 from the current 2.5 percent level. The likelihood was 52 percent on May 21, according to a Credit Suisse Group AG index based on swaps.

Analysts last month lowered year-end estimates for eight of the G-10 currencies and repeated a call for the yen to weaken, according medians in Bloomberg surveys. Of the 10, they remained bullish on just the kiwi, named for the flightless bird on the dollar coin.

New Zealand's dollar will rise to 72 U.S. cents by Dec. 31 from 68.05 cents at the end of May, based on the median estimate of 31 strategists surveyed by Bloomberg. Analysts cut forecasts for the currencies of Australia, Canada and Norway, which investors often compare with New Zealand's dollar because all four rely on commodities for growth.

UBS AG and Citigroup Inc., the world's second- and fourth-biggest currency traders, said commodity exports and yield differentials will boost demand for the kiwi. National Australia Bank Ltd., the second-best forecaster in 2009, expects the New Zealand dollar will gain to 73 U.S. cents by year-end.

Loomis Sees Parity

``We like the longer-term outlook for New Zealand very much relative to other countries and absolutely on its own,'' said Dan Fuss, who is based in Boston and whose Loomis Sayles Bond Fund beat 95 percent of competitors in the past year. ``And if we have a demonstrably higher interest rate on what we consider an appreciating currency, then we're going to buy it. And every time it gets hit on the head, we'll probably buy some more.''

Loomis Sayles bought kiwi bonds this quarter, Fuss said. The nation's trade with Asia and a government plan to balance the budget may propel the currency to parity with the greenback in coming years, he said.

Demand for New Zealand's financial assets pushed an index of bonds due in more than a year up 11 percent the past 12 months in U.S. dollar terms, second only to South Africa among 26 debt markets tracked by the Paris-based European Federation of Financial Analysts' Societies.

Fed on Hold

The kiwi weakened 6.4 percent against the U.S. dollar and 8.9 percent versus the yen in May as Europe's sovereign-debt woes led traders to reduce holdings of higher-yielding assets and buy dollar-denominated securities.

Federal Reserve Bank of Chicago President Charles Evans indicated May 31 that the European debt crisis will prompt the U.S. central bank to delay raising interest rates.

The International Monetary Fund said on May 26 that New Zealand dollar's may be overvalued by between 10 percent and 25 percent and needs to fall to narrow the country's current-account deficit.

The shortfall shrank to NZ$5.47 billion ($3.7 billion) in the 12 months ended Dec. 31 from NZ$5.9 billion in the year ended Sept. 30.

Investors may seek the relative safety of U.S. Treasuries in the weeks ahead, limiting the New Zealand dollar's gains, said Hideo Shimomura, who helps oversee the equivalent of $55.4 billion at Mitsubishi UFJ Asset Management Co. in Tokyo. The firm is a unit of Japan's biggest publicly traded bank.

GDP Forecast

``The currency will be dominated by the situation in Europe, even if they hike,'' he said in reference to the central bank. ``I'm not bullish.''

Shimomura is keeping New Zealand bonds only in funds he manages whose investing guidelines require such holdings. He predicts the currency will fall to 65 cents by year-end.

Kokusai's Horii also said the currency may decline because of global turbulence, though he is sticking to his view that central bank rate increases later this year will push the kiwi higher. Kokusai has invested in the kiwi through its Asia Pacific Sovereign Open Fund since its opening in January 2009.

The kiwi offered total returns of 40 percent since then against the U.S. dollar, the most among the Group of 10 currencies, according to data compiled by Bloomberg.

Prime Minister John Key, the former head of foreign exchange at Merrill Lynch & Co., said the nation's currency may fail to keep pace with gains in the higher-yielding Australian dollar.

Carry Trade

``The carry trade is there although one could make the case it is less attractive at the moment than Australia where interest rates are a full 2 percentage points higher,'' Key, 48, said in an interview June 1.

Finance Minister Bill English said the economy will expand 3.2 percent in the year ending March 31, 2011. That's up from a December forecast of 2.4 percent amid rising commodity prices. ``Our assumptions are conservative,'' English said in Wellington on May 21.

Fonterra Cooperative Group Ltd. in Auckland, the world's largest dairy exporter, forecast May 25 that it would pay its 10,500 farmers 8.2 percent more for milk in 2011, spurred by ``strong'' demand from China, the rest of Asia, the Middle East and North Africa. The group accounts for about 40 percent of the global trade in butter, milk powder and cheese.

Limited `Headroom'

Year-ahead inflation expectations are at 2.9 percent, the Reserve Bank said on May 25, citing a quarterly survey of 74 business managers. That's up from 2.1 percent in the previous report. The central bank aims to keep annual inflation between 1 percent and 3 percent on average.

Bollard, the central bank governor since 2002, has ``very limited inflation headroom'' and that makes it hard for him to keep the benchmark rate unchanged at this month's meeting, said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada, Canada's biggest lender.

Bollard slashed rates from a record high 8.25 percent to an all-time low 2.5 percent over seven meetings beginning July 2008 as the U.S. subprime crisis sparked the worst global financial crisis since the 1930s.

``Over the years, New Zealand financial management, in particular the central bank, has been outstanding,'' Loomis' Fuss said. An independent central bank ``is a tremendous asset to a country and for investors. New Zealand's got it,'' he said.

Bloomberg News (via BusinessWire)

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