Kiwi may keep climbing this week, say currency strategists

Photo / Martin Sykes

The New Zealand dollar may climb to a new post-float high this week as the US debt ceiling deadlock weighs on the greenback, a the stronger run of local data puts pressure on the Reserve Bank to start hiking the official cash rate.

Five of the eight economists and market strategists surveyed by BusinessDesk saw the kiwi gaining further ground although upward movements are expected to remain capped short of 88 cents.

Two saw the currency falling over the week as investors bulk up on safe-haven assets to the detriment of commodity-linked currencies such the New Zealand and Australian dollar, and one saw the outlook as mixed.

The kiwi, which recently traded at 86.24 US cents, may trade between a media range of 84 US cents and 87.50 cents, according to the poll.

The key events this week which may steer the currency are the deadlocked debt ceiling negotiations in the US, and the Reserve Bank's official interest rate announcement on Thursday. Currency markets opened on edge this morning after Republicans walked away from a possible deal over demands that any hike in the borrowing limit be a temporary measure, which would force President Barak Obama to request further borrowing as early as 2012.

The sparked fresh fears that officials will not be able to lift the US$14.29 trillion cap before the August 2 deadline, after which the world's biggest economy will begin defaulting on its debt repayments, with the downgrade of the triple-A debt ranking likely to follow from credit ratings agencies.

"There is certainly more pressure on the US dollar to come, but whether that translates into strength on our side is uncertain," said Alex Sinton, a senior dealer at ANZ New Zealand, who saw safe haven currencies such as the Swiss franc and Japanese yen as the main gainers this week.

Still, the deadlocked US debt talks could have the opposite effect, say economists, and provide support for the New Zealand dollar as investors look for reasonably sound economies in which to park their money.

"If you want to sell the New Zealand dollar, you have to buy US dollars, and that's a place no one wants to be right now," said Derek Rankin, a director at Rankin Treasury Advisory. "The safe haven landscape is being rewritten, and the market has no past experience of what happens from here."

On the local front, markets will be looking to Thursday's for the Reserve Bank's official cash rate announcement, where Governor Alan Bollard is expected to keep rates on hold at 2.5 per cent but bring forward the timing of hikes following the higher-than-expect growth and inflation readings.

Government data showed that the New Zealand economy grew 0.8 per cent in the first three months of this year, double the rate expected, and consumer price index data revealed inflation rose 1 per cent in the second quarter, outpacing the 0.8 per cent forecast by economists in a Reuters survey.

"We're expecting the Reserve Bank to sound more hawkish on Thursday, alluding to the possibility of removing the insurance cuts in September and again in December," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "That will underpin demand for the New Zealand dollar."

On the cross rates, traders will be watching for the release of Australian consumer price index data for the first quarter, with the market betting prices will have risen 0.7 per cent, although economists said there was plenty of room for movement.

"A headline move above 1 per cent could be the catalyst for interest rate markets to remove some pricing on RBA cut rates," said Mike Burrows, a market strategist at Bank of New Zealand, and see the kiwi fall on the cross rate.

Traders are currently betting that Reserve Bank will cut the official interest rate by 39 basis points over the next 12-months.

The other local data being released this week that will feed into the kiwi's momentum will be June trade balance numbers, due tomorrow, the National Bank Business Outlook survey, due Wednesday, and building consents on Friday.

Offshore, the market will be waiting for the release of the US Federal Reserve's Beige Book on Wednesday and employment data for the June quarter, although these will be largely overshadowed by the debt ceiling negotiations.