NZ dollar volatile ahead of Fed printing

Photo / Martin Sykes

The New Zealand dollar faces a lot of volatility this week as the market gears up for the Federal Reserve's second round of printing money in a bid to revive a sagging recovery.

The views of eight economists and strategists in a BusinessDesk survey were mixed, though none held any firm convictions for the kiwi's direction this week with so much event risk going on.

Two predict it will stay in its current range, two gave it a downward bias, two gave it an upward bias, while two others said there are too many uncertainties ahead of the Fed's announcement on Wednesday in the U.S.

Economists are betting the Fed will print between US$80 billion and US$100 billion a month up to a range of between US$250 billion and US$2 trillion, according to a Reuters poll.

That uncertainty over the size and scope of the programme has kept traders on their toes as they try to pre-empt the Fed's thinking.

The Dollar Index, a measure of the greenback against a basket of six trading partners, has dropped 14 per cent since June to 76.96 as talk of a second round of asset purchases surfaced amid a stalling recovery in the world's biggest economy. The kiwi dollar gained 16 per cent over this period, and recently traded near a 27-month high at 76.60 U.S. cents from 75.49 on Friday in New York.

"This market is not going to go away - the US is printing more money and that can hardly help the value of the US dollar," said Derek Rankin, director at Rankin Treasury Advisory Ltd.

"The kiwi is looking to go higher, and that 80 US cents target we've been talking about some time looks like it will get tested at some stage."

Rankin has an upward bias for the kiwi this week, though if the Fed's so-called QE2 programme falls short of expectations, it could spark short-lived strength in the greenback.

"If the Fed disappoints, we're going to see a correction in the U.S. dollar, but a turnaround is not going to change the fundamental market which is for a weaker U.S. dollar," he said.

Darren Gibbs, chief economist at Deutsche Bank NZ, said there's no point for the Fed to print money and fall short of expectations when it knows the market is looking for the central bank to print the size of New Zealand's gross domestic product a month until the US economy climbs out of the doldrums.

He predicts the kiwi trade in a broad range of between 74.50 US cents and 77 cents this week.

America will be the focus of investors this week with more manufacturing and inflation data due out this week, culminating in non-farm payrolls on Friday, which is expected to show a gain of 60,000 jobs in October, though the unemployment rate it forecast to hold at 9.6 per cent.

On Tuesday in the US, Americans will go to the polls in the mid-term elections where they will vote on the make-up of the House of Representatives, a third of the Senate, and two-thirds of the state governors.

The Reserve Bank of Australia will announce any movements to the target cash rate tomorrow, and investors are betting the benchmark rate will stay at 4.5 per cent after last week's benign inflation data.

The RBA was the first Group of 20 nations country to start tightening policy when it dodged recession last year.

Investors are picking the RBA to lift its benchmark rate 43basis points over the next year, while New Zealand's central bank is priced into to hike the official cash rate by 76 basis points, according to the Overnight Index Swap curve.

The kiwi climbed to 77.59 Australian cents from 77.37 cents on Friday in New York.

Imre Speizer, markets strategist at Westpac Banking Corp., said a surprise hike by the RBA would lift the Australian dollar higher, but it the central bank sits on its hands, the kiwi looks likely to gain on the cross-rate as New Zealand's economic fundamentals slowly improve.

New Zealand's household labour force survey will be on the back-burner this week with offshore concerns moving to the fore.

The survey, which has come under pressure for its volatility this year is expected to show unemployment dropped 0.1 percentage point to 6.7 per cent, according to a Reuters survey.

Khoon Goh, head of market economics and strategy at ANZ New Zealand, said traders will briefly register what happens in the survey, but all of the week's risks come from "offshore events."

He said the kiwi faces a turning point this week and could move three or four cents, though it was too hard to pick either way.

The European Central Bank, Bank of England and Bank of Japan will review their benchmark interest rates this week.

While the ECB and BoE aren't expected to make any changes to monetary policy, investors will be watching Japan's central bank, which brought forward its meeting by two weeks to a day after the Fed's announcement.

The BoJ has already flagged quantitative easing worth about US$60 billion and an effective interest rate of 0 per cent.

Strategists were more upbeat about the kiwi's outlook on a trade-weighted basis, with five of the eight having an upward bias, while the other three expected it to stay in familiar ranges over the week.

The kiwi rose to 67.68 on the trade-weighted index of major trading partners' currencies from 66.56 on Friday in New York, and gained to 61.52 yen from 60.73 yen.

It increased to 54.78 euro cents from 53.90 cents last week, and was little changed at 47.69 pence from 47.64 pence.

On the data radar this week is Chinese performance of manufacturing index, and Australian housing, manufacturing and retail data over the next two days.

New Zealand's commodity price data comes out today, while Fonterra holds its fortnightly online auction on Tuesday in the US.