Kiwi may break above 84 US cents on sturdy economic news

GDP data due out this Thursday is expected to confirm economic recovery, which is likely to push the New Zealand dollar even higher. Photo / Mark Mitchell

The New Zealand dollar may rise above 84 US cents for the first time since the 1985 float amid expectations data this week will confirm the economic recovery is gaining pace, helping lift local interest rates more than their global peers this year.

Three of the five economists and market strategists surveyed by BusinessDesk saw the kiwi gaining, while two saw the currency falling from its current level but remaining well supported.

The kiwi, which recently traded at 83.54 US cents, may trade between a median range of 81.83 cents and 84.10 cents, according to the survey. Key to the currency's performance this week will be whether the improving local economy is able to maintain its momentum in the face of a recent spike in global risk aversion, seen after a weaker-than-expected US job report and fresh European sovereign debt fears.

On the local front, the main data point will be the much-delayed release of gross domestic product numbers for the first three months of this year, which is expected on Thursday morning. The market is betting New Zealand's economy expanded by 0.4 per cent in the first quarter, according to a Reuters survey.

That exceeds the Reserve Bank's forecast of 0.3 per cent expansion, and if it comes in as expected, will be taken as a sign that the New Zealand economy is more robust than previously thought in spite of the impact of the Feb. 22 earthquake in Christchurch which caused up to $15 billion in damage.

"It's extremely historical but it's still an important piece of data," said Philip Borkin, an economist at Goldman Sachs. "It's key to determining the underlying strength of the economy".

That is likely to reinforce sentiment in the economy and bolster support for the New Zealand dollar further, Borkin said.

The currency is already seen as outpacing its peers this year, with the market betting the Reserve Bank will raise the official cash rate by 68 basis points over the next 12-months according to the Overnight Swap Curve index. That compares with a 14 basis point cut by the Reserve Bank of Australia, and a 17 basis point increase by the US Federal Reserve.

"Almost 70 basis points from the Reserve Bank over the next 12 months stands out quite strongly against the other central banks," said Mike Burrowes, a market strategist at Bank of New Zealand.

The key downside risk for the currency on the week is reversal in global risk appetites, which tumbled on Friday after US non-farm payrolls came showed the world's biggest economy added just 18,000 jobs in June, well short of the 105,000 improvement forecast by a Bloomberg poll.

That saw the Standard & Poor's 500 Index close 0.7 per cent lower at 1,343.80, Europe's Stoxx 600 drop 0.8 per cent to 273.76, and the 19-commodity Thompson Reuters Jefferies CRB index fall 0.8 per cent to 343.55.

The "risk off" theme gathered momentum over the weekend when European Council President Herman van Rompuy called an emergency meeting with top European officials dealing with the sovereign debt crisis, which is scheduled to start today according to Reuters.

The call for the meeting came after a sell-off of Italian assets on Friday sparked fresh fears that the Greek debt crisis is spreading to other heavily indebted euro zone members. European officials subsequently denied that the talks would centre on Italy, however that did little to quell market speculation with the country sporting the highest sovereign debt ratio relative to its economy in the euro zone after Greece.

"If the European situation continues to fuel the risk off sentiment, I can't see any reason why the kiwi would be outperforming," said Tim Kelleher, head of institutional FX sales New Zealand at ASB Institutional in Auckland.

This week, risk sentiment will also be steered by a swathe of economic data out of the U.S., the highlight of which will be the US Federal Reserve's minutes from its most recent meeting, followed by trade balance data for May, and consumer and producer price inflation numbers for June.

The New Zealand dollar may gain on the Australian currency this week, with a spate of Chinese economic data at the end of the week likely to overshadow Australian business and consumer confidence data for June.

The market will be closely sifting through the Chinese industrial production and retail sales numbers for June, as well as GDP figures for the first quarter of this year for a read on activity levels, inflation and the effects of policy tightening in the world's second biggest economy.

Any unexpected moves towards the downside are likely to trigger a pullback in the Australian currency, and to a lesser extent the kiwi. China is Australia's biggest trading partners.