NZ dollar outlook: Kiwi may gain as bond sale settles, yields appeal

BUSINESSDESK: The New Zealand dollar may gain this week from near a three-week high as the government's sale of inflation-linked bonds settles, offshore investors are drawn to the nation's relatively attractive yields and manufacturing and payrolls data looms.

The kiwi recently sold at 82.24 US cents from 82.21 cents on Friday in the US. It will trade between 80.90 US cents and 83.55 cents this week, based on a BusinessDesk survey of six strategists, with all saying it will have a positive tone.

The Debt Management Office's sale of $2.5 billion of 2025 inflation indexed bonds with a coupon of 2% and a real yield of 1.96% settle on October 31, meaning offshore buyers would need to buy kiwi dollars to pay for the debt.

That could be as much as $1.5 billion of the total, market watchers say.

There is little in the way of local data out this week. Building consents for September are due out on Wednesday and the ANZ Commodity Price Index on Friday.

Offshore, though, the news kicks off with the Bank of Japan decision tomorrow, China's PMI is on Thursday, US ISM and non-farm payrolls and then US elections looming next week.

"If the picture is slightly positive then 82.50 could be tested but it will be a hard road," says Alex Sinton, senior dealer at Australia & New Zealand Banking Group. "People are conscious of the yield differentials" favouring the kiwi though "it could be a waiting game" this week.

The US ISM manufacturing measure for October is expected to be unchanged at a reading of 51.5 on a scale where above 50 signals expansion. Non-farm payrolls in the US are expected to show companies added 120,000 jobs this month, up from 114,000 last month, while the jobless rate climbed to 7.9% from 7.8%. 

The payrolls figures are the biggest data before the November 6 election, where the outcome between President Barack Obama and Mitt Romney is too close to call.

"It is going to possibly have a bearing on the election itself," says Imre Speizer, a market strategist at Westpac Banking Corp. A strong jobs number would be positive for President Obama. 

"My own bias for the week is upwards [for the kiwi] in the absence of anything really market moving in New Zealand."  

New Reserve Bank governor Graeme Wheeler "held the line when he was expected to provide an easing signal" and there is still a residual effect of the OCR decision last week that is positive for the kiwi.

New Zealand 10-year bonds are yielding about 3.52%, while comparable 10-year Treasury bonds yield 1.75%, a spread of 177 basis points. The official cash rate was kept at 2.5% last week, versus a Federal Reserve target near zero.

Building consents for September may add to August's 1.9% gain as Christchurch roars back to life and Auckland demand stays strong.

"With strong residential investment growth forming the centrepiece of our above-consensus growth outlook, we expect reaccelerating trend growth in dwelling consents," UBS economist Robin Clements says in a note.

Commodity prices for October, due on Friday, would follow the strongest gains in world prices in September since March 2011.

The latest GlobalDairyTrade auction of dairy products takes place this week, adding to clues about prices of New Zealand's commodity exports.

The Bank of Japan may ease monetary policy through a 10 trillion yen top-up to its asset purchase programme, according to Bank of New Zealand.

"A result on our expectations may still disappoint the market, putting additional pressure on the yen to rise," says Mike Jones, currency strategist at BNZ.

The kiwi recently traded at 65.50 yen from 65.46 yen in New York on Friday. It is trading near a recent high of about 69.70 last week, which was a six-month high.

The New Zealand and the Australian dollars "are a bit better supported by their better fundamentals and high yields," Peter Cavanaugh of Bancorp Treasury Services says. "It is looking increasingly like New Zealand has a less dire story to tell than the rest of the world."