Opinion: Kiwi$ could push to 66 USc this week as NZ interest rates rise

By Danica Hampton After slipping briefly below 0.6250 mid week, NZD/USD finished the week on a firmer footing closer to 0.6450. Early in the week, NZD/USD was pressured by a generally firmer USD (after Russian and Japanese officials reaffirmed the USD's status as the predominant reserve currency) and steady selling of NZD/JPY from Japanese based accounts. However, the NZD recovered towards the end of the week as risk appetite rebounded and improving US data helped convince investors the US recession may be bottoming. Our risk appetite index finished the week around 36%, well up from Monday's 32%. There was also a big sell-off in NZ swap rates late last week (2-year swap rates rose 20bps to 3.95%) and paying from domestic mortgage books is expected to keep NZ swap rates underpinned again this week. NZ-US 3-year swap spreads widened by about 10bps last week to 2.35% and any further widening pressure should help keep NZD/USD underpinned. There is plenty of event risk this week. Globally, the key event will be the FOMC decision. If the Fed conveys a sense that rate hikes are unlikely before year-end the USD will likely come under fresh selling pressure. However, if the FOMC hints that its ultra easy monetary policy can't last forever and that it's time to starting thinking about an exit strategy, the USD may extend its recent recovery.

The local calendar is also full. Westpac's quarterly consumer confidence reading is expected to nudge up to around 105-110 region, while Thursday's balance of payments (Q1) will likely register an improvement, the result of falling offshore debt servicing flows (courtesy of lower global interest rates), decent export volumes and weaker imports (of both the consumption and investment varieties). And we forecast a 0.7%q/q decline for Friday's Q1 GDP. All up, it will probably be a choppy week for NZD/USD. However, we expect dips will be limited to the 0.6300-0.6350 region and suspect we'll see a push back towards 0.6550-0.6600. The USD pretty much went sideways on Friday night, as there was little in the way of fresh information to drive currency markets. Moody's warned it may cut the rating of the state of California if it doesn't seek ways to deal with its US$24b budget deficit. Kansas City Fed President Hoeing said the Fed was thinking seriously about its exit strategy, but inflation was not yet an imminent danger. Weekend press suggests the Bank of England is working on an exit strategy from its extraordinary accommodative policy (UK Times). While the AFP reports that China is stock piling commodities and the recent rebound in commodity prices may stall. EUR/USD spent most of last week trading choppily within a 1.3800-1.4000 range. Market chatter suggested that Asian central banks were buying weakness and selling into strength (reportedly related to option structures around 1.3800-1.4000 levels). Early this week, the focus will be on European data. On Monday, the German IFO will provide an update on business confidence. While Tuesday night's PMI data will provide an update on the state of manufacturing and services activity in Europe. Although the Fed is widely expected to leave both rates and its quantitative easing program unchanged, the FOMC statement will be the key event this week. If the Fed reiterates that interest rates in the US will remain low for some time to come (and conveys a sense that rate hikes are unlikely before year-end) the USD will likely come under fresh selling pressure (expect the USD Index to re-test support in the 79.00 region). However, if the FOMC hints that its ultra easy monetary policy can't last forever and that it's time to starting thinking about an exit strategy, the USD may extend its recent recovery (expect the USD Index to re-test resistance in the 81.50 region). It will also be important to keep watching US bond yields and the shape of the yield curve. Over the past few weeks, the USD has tended to strengthen as the US yield curve has flattened (reflecting a reassessment of inflation expectations and reduced concern about souring offshore demand for longer dated US denominated debt). This week sees record issuance of US$104b worth of US Treasury notes and investors will be nervously watching for how this supply is absorbed. Should longer dated US yields sell-off strongly, and the yield curve steepen, this will likely add downward pressure to the USD. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.