Kiwi may fall after US downgrade

The New Zealand may extend its slide against the greenback after Standard & Poor's downgrade of the US credit rating. File photo / NZ Herald

The New Zealand may extend is slide against the greenback, as investors continue to abandon equities and take risk off the table in response to Standard & Poor's downgrade of the U.S. credit rating.

Six of the eight economists and market strategists polled by BusinessDesk saw the kiwi falling in step with the ongoing rout on global equity markets, although volatility is expected to ease towards the end of the week. Two saw the currency as mixed, with U.S. dollar weakness outstripping the decline in risk appetites.

The kiwi recently traded at 83.71 U.S. cents, and may trade between a median range of 81.50 U.S. cents and 85.22 cents this week, according to the poll.

Economists said the kiwi will trade in a volatile range this week, with unfolding headlines in the U.S. and Europe likely to dominate the currency's movements over the next five days. The primary focus at the start of the week will be on the developed markets' response to Standard & Poor's decision to downgrade the U.S. credit rating from AAA to AA and place it on negative outlook.

The sharp pullback in investors' risk appetites, seen last week amid renewed concerns about the U.S. economy, was already gathering momentum on region stock markets today, with the NZX 50 Index, the first bourse to open after the rating agency's announcement, falling 2.7% to 3,188.92 at the midday mark.

Asian markets were however more subdued with the Nikkei 225 Index last trading 1.6% lower at 9,148.29.

"Anyone who says the downgrade means the U.S. dollar goes down is correct, but anyone who says the kiwi will go up is naïve," said Imre Speizer, market strategist at Westpac Banking Corp. "At the moment risk aversion is dominant, equities are reacting negatively to the downgrade, and that will keep pushing the kiwi lower."

The downgrade by the world's biggest ratings agency puts the focus on the Federal Open Market Committee meeting, which takes place Wednesday New Zealand time. The announcement may provide a strong steer for risk sentiment, with the market looking for signs that the U.S. Federal Reserve has the resources and political capital to jolt the world's biggest economy out of its rut.

"Whatever they do or say, they will be looking to support confidence," said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia.

Finance Ministers and central bank governors of the world's seven largest developed economies, known as the G-7, today signaled that they are willingness to intervene in foreign exchange markets to cope with "excess volatility and disorderly movements" in major currencies.

The other major event that may dominate currency markets this week will be the European Central Bank's expected announcement on its bond buying programme.

The markets are expecting the central bank to announce that it will start buying Italian bonds in an attempt to bring skyrocketing yields on 10-year securities below 6%, a level above which Italy will not be able to meet its debt repayments.

The move is seen by markets as a direct response to ease the volatility caused by the bank last week when it specifically excluded Italy from its latest bond buying programme, and triggering a flight of confidence.

"Clearly with it's becoming more dicey with the market on tender hooks, which is why we need to see European Union policy makers come up with something permanent and defining," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

The kiwi is expected to ignore local data this week, which is mostly second tier.

Statistics New Zealand is expected to release electronic card transaction data for July tomorrow, and the retail trade data for the July quarter on Friday.

The ANZ Roy Morgan Consumer Confidence survey for August is due on Thursday, as well as the Bank of New Zealand's Performance of Manufacturing Index for July.

China is set to release its it monthly tranche of inflation and manufacturing data for July tomorrow, although traders said the market will most likely focusing on the major macro crises rather than the numbers.