NZ Dollar Outlook: Kiwi may fall as OCR review looms

NZ Dollar Outlook: Kiwi may fall as OCR review looms

By Jason Krupp

March 7 (BusinessDesk) - The New Zealand dollar may extend its losses this week, with the market betting the Reserve Bank will cut interest rates in a bid to stimulate the economy after the devastating Christchurch earthquake dented the outlook for growth.

All seven of the economists and strategists surveyed by BusinessDesk expect the kiwi dollar to come under further pressure this week ahead of Thursday's official cash rate announcement, where Governor Dr. Alan Bollard forecast to cut rates by 25 basis points to 50 basis points.

The kiwi fell to 73.64 U.S. cents from 73.84 cents on Friday in New York, having been heavily sold since the Feb. 22 quake. Treasury estimates have put the cost of the earthquake at as much as $15 billion dollars, which will slow gross domestic product growth this year.

Business confidence has already been severely dented by the earthquake, according to the Bank of New Zealand's latest monthly survey, with a net 20% of respondents saying they expect the economy to be worse in a year's time.

That's notably down from the net 20% of businesses that expected the economy to be better a month ago.

However, three of the seven strategists say the currency may rise after the announcement.

“There’s about 30 to 35 basis points priced in, and if we only get 25, there could be a short upwards spike, and if we get 50, we could get a downwards spike,” said Philip Borkin, an economist at Goldman Sachs & Partners.

The kiwi is also expected to extend its decline against the Australia currency, with the robust growth of Australia’s economy contrasting strongly against the slump in New Zealand, according to strategists. The New Zealand dollar was last at 72.70 Australian cents, down from 72.82 cents last week, near a 19-year low.

The market will be closely watching for the release of the National Australia
Bank business confidence survey tomorrow and February jobs data as a read on when the Reserve Bank of Australia may begin tightening rates. The Australian economy is predicted to have added 20,000 jobs last month.

The market is betting that the RBA will hike rates by 35 basis points in the next 12-months, whereas New Zealand is expected to cut rates by 20 basis points, according to Overnight Index Swap curve.

Traders said the extent of the Kiwi's decline may be limited with the currency at lows against the Australian dollar. Additionally, the market will be paying close attention to the release of the latest consumer price data in China, with any unexpected hikes likely weigh to weigh on the Australian dollar.

"If we get a rate cut and the RBNZ is very dovish and we get a huge employment report out of Aussie, that could be enough to see kiwi go under further," said Khoon Goh, head of market economics & strategy at ANZ New Zealand.

Mike Jones, markets strategist for Bank of New Zealand, said the Kiwi dollar will also be pressured by heightened risk aversion in global markets. The ongoing conflict in Libya has seen oil prices stabilise around US$116 a barrel - a level last seen before the global financial crisis. That saw global equities fall, with the Standard & Poor's 500 Index ending the week 0.7% lower at 1,321.15, while Europe's Stoxx 600 fell 0.6% to 281.9.

"It doesn't look like it (Middle East conflict) is going to settle down soon," Jones said. "We're seeing risk aversion settle in, which has dented demand for growth-sensitive currencies."

On a trade weighted basis the kiwi fell to 64.92 against an index of major trading partners’ currencies from 65.11 on Friday in New York. Jones expects the TWI to fall further as tensions in North Africa persist.

(BusinessDesk)

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