NZ dollar outlook: Kiwi may rise on demand for yield, growth assets

The New Zealand dollar may extend its gains this week on rallying equity markets, offshore demand for yield and a favourable outlook for the local economy.

The kiwi recently traded at 84.53 US cents and earlier rose to 84.92 cents. It may move in a range of 83.50 cents to 85.50 cents this week with a bias to the topside, according to a BusinessDesk survey of five traders and strategists.

The Dow Jones Industrial Average reached a five-year high in New York on Friday, helped by figures showing the world's biggest economy stacked on jobs in January, even as the unemployment rate increased.

New Zealand's NZX 50 Index reached a six-year high last week. With the US and Japan keeping interest rates low and printing money, more investors are looking Down Under for better returns.

"The yield good news story is coming to fruition," says Peter Cavanaugh, senior client adviser at Bancorp Treasury Services. As well, "equity markets are starting to price in some tremendous optimism. While it is overdone, there's a risk of some more topside".

Figures on Thursday are expected to show the New Zealand unemployment rate fell to 7.1 percent in the fourth quarter from 7.3 percent, based on a Reuters survey of 10 economists, while the economy added jobs. Growth in the labour market is set to continue as Christchurch embarks on its massive rebuild of a CBD levelled by earthquakes.

"The domestic economic outlook remains strong and that's clearly supportive of a higher kiwi," says Imre Speizer, senior markets strategist at Westpac Banking Corp. "Globally, financial conditions have well and truly stabilised. It's no surprise then, given that mix that markets are buying risky currencies" such as the New Zealand dollar.

Mr Speizer predicts the kiwi will reach 85.70 US cents over the next few weeks and may chart a record 90 cents in the next six months.

Investors have also been digesting last week's update from the Reserve Bank on monetary conditions. Governor Graeme Wheeler kept the official cash rate at 2.5 percent, while noting a pickup in the economy and voicing concern over a housing market that is gathering steam.

"There are no rate cuts priced into the New Zealand dollar," says Tim Kelleher, head of institutional FX sales at ASB Institutional. "Interest rates are driving currencies at the moment."

He noted that New Zealand 10-year bonds are yielding more than there Australian counterparts and there is still expectation the Reserve Bank of Australia will cut its cash rate from 3 percent in coming months, though the RBA is likely to stand pat tomorrow.

That is the prevailing view in a Reuters survey of 23 economists, though some are still calling for a quarter-point cut.

The kiwi recently traded at 81.39 Australian cents, near the highest in about 2½ years and has started "a sustained uptrend", according to Bank of New Zealand strategist Mike Jones.

"The RBA will be the big one this week. The risk is they hold interest rates which could see the Aussie push higher and provide for a bit of a pause" in the kiwi dollar's gains, he says.

"There's still support for the kiwi, though, with exporters looking to buy on dips."

The trade-weighted index was recently at 76.16, near a five-year high.

Derek Rankin of Rankin Treasury Advisory says the kiwi is being driven by events beyond Australia and New Zealand.

"The driving pressure here is the fact that the Americans and Japanese are printing money," he said. "Capital has to find yield – sharemarkets and high-yielding currencies are both going up."

(BusinessDesk)