Currency: Kiwi may gain as Dubai concerns ease, Fonterra sells powder

The New Zealand dollar may push higher this week as concerns ease about the impact of a potential default on debt payments by Dubai will have on the global economic recovery.

Four of nine economists and strategists in a BusinessWire survey predict the kiwi may push higher, with a fourth forecasting it will consolidate with an upwards bias, after the United Arab Emirates central bank said it would introduce a special liquidity scheme for foreign banks to provide comfort to financial institutions exposed to investment company Dubai World.

Two economists expect the currency will trade in familiar ranges this week, while the last two forecast it to fall.

Investors' appetite for higher-yielding, or riskier, assets, returned after Reuters reported an Abu Dhabi official as saying the capital of the UAE "will look at Dubai's commitments and approach them on a case-by-case basis."

Risk currencies such as the kiwi and Australian dollars pared their earlier losses. The kiwi climbed to 71.41 US cents from 70.47 cents on Friday in New York, while the Australian dollar rose to 91.19 cents from 89.69 cents.

"The markets are beginning to get over" the big sell-off caused by the Dubai news last week, said Darren Gibbs, chief economist at Deutsche Bank. "Risk currencies opened stronger this morning" and will probably drift higher this week, he said.

Gibbs predicts the kiwi has already touched its low this week and will push towards 73.30 US cents as markets shake off their jitters about the Middle East.

The major domestic news for the currency this week will be Fonterra's online auction on Tuesday in the U.S., and any gain in the price of whole milk powder should support the currency, according to ANZ National Bank economist Phil Borkin.

"Dairy prices have firmed further, and though they have come from a very low base, even at these levels they're looking reasonable," Borkin said. "We could be in for another gain this month."

The price of whole milk powder has surged more than 88 per cent from its low in July, and Fonterra's global trade managing director Kelvin Wickham has indicated they're "above long-term sustainable levels."

He predicts dairy prices will begin to ease when European and American farmers resume production in the first quarter of 2010, though if they continue to rise, "they'll come down faster."

Tomorrow, the Reserve Bank of Australia will review monetary policy for the last time this year, and following the wake of the Dubai debacle, markets are now split on whether the central bank will boost rates 25 basis points in what would be its third hike in a row.

The RBA was the first central bank in the G-20 to begin tightening monetary policy, and its aggressive approach has highlighted the different approaches between New Zealand and its closest neighbour.

Still, consensus among economists is that the bank will raise rates as it doesn't meet in January, and a further increase would be supportive of the trans-Tasman currencies.

The kiwi fell to 78.20 Australian cents from 78.54 cents on Friday in New York, and Imre Speizer, markets strategist at Westpac Banking Corp., said the New Zealand dollar would probably push back towards 80 cents this week.

Derek Rankin, director of Rankin Treasury Advisory, expects the currency will edge higher this week, though the first couple of days of the past four months have seen US equity markets struggle.

"The dip we've seen going into the end of the month has been shallower than the past few" and December is traditionally a positive month for the S&P 500, he said.

America's employment data for last month comes out on Friday, and is expected to continue to show signs of improvement, he said.

Japan's Finance Minister Hirohisa Fujii stoked speculation his government may intervene in foreign exchange markets after he raised the prospect of G-7 nations issuing a joint statement on currencies, after the yen surged to a 14-year high against the US dollar.

The kiwi climbed to 61.82 yen from 60.85 yen on Friday in New York.

Investors flocked to the relative safety of the yen after Dubai World said it wanted to defer debt repayments and raised fears about the extent of exposure European and American banks have to the company.

The investment company has some US$59 billion of liabilities, including the US$3.5 billion Islamic bond of its Naheel real estate unit.

The Volatility Index, which measures the cost of insuring puts on the Standard & Poor's 500 index and is commonly called Wall Street's "fear gauge," surged 21 per cent to 24.85 on Friday in New York as markets remained jittery about the state of the financial system.

Westpac's Speizer said the kiwi-yen cross has "broken below old supporting levels and looks pretty weak."

"We may see a similar bounce earlier this week, though in the medium-term I favour it going lower, and when it resumes its fall, it could go to 57 yen," he said.

Four economists surveyed expect the currency will consolidate on a trade-weighted basis this week , with two predicting it will fall, two forecasting it to stay range-bound with a positive bias, and one picking an increase.

The currency gained to 63.41 on the trade-weighted index, or TWI, a measure of the kiwi against the greenback, yen, euro, pound and Australian dollar, from 63.01 on Friday in New York. It gained to 47.56 euro cents from 47.39 cents last week, and edged higher to 43.20 pence from 43.11 pence.

On the data radar this week is a slew of manufacturing data in Europe, China and the U.S., along with GDP and retail figures in the Eurozone. Investors will also be looking to see how strong consumer spending was in America's Black Friday sales, which are used as an indication of how the Christmas shopping season will fare.

Domestically, building consents came in stronger than expected today, while ANZ's Commodity Price Index is out on Thursday and the government's financial statements for the four months ended Oct. 31 are released on Friday.

The European Central Bank's review of monetary policy on Thursday is also tipped to be interesting, as President Jean-Claude Trichet is expected to drop more hints about when and how the central bank will begin withdrawing stimulus.