NZ dollar outlook: kiwi may gain, pushing TWI to record on likely carry trade return

The New Zealand dollar may extend its gains against the yen and the greenback, pushing the trade-weighted index to record levels and further above the central bank's comfort zone as Japan joins the US in printing massive volumes of its currency.

The kiwi is trading at 84.07 US cents from 84.31 cents in New York on Friday and climbed to as high as 82.95 yen, a five-year high, from 82.21 yen. That drove the TWI as high as 77.75, the highest since the kiwi began trading freely in 1985.

The local currency may trade in a range of 83.25 US cents to 85 cents this week and is more likely to test the top of the range, according to a BusinessDesk survey of six traders and strategists.

The New Zealand dollar reached a five-year high of 83.09 yen today, driven by Bank of Japan governor Haruhiko Kuroda's announcement last week that he will double monthly bond purchases to about 7.5 trillion yen ($US77 billion) as he seeks to achieve 2 percent annual inflation in two years.

That is almost as vast as the Federal Reserve's $US85 billion of monthly bond buying and in a smaller economy it may spur retail investors in Japan, faced with record-low domestic interest rates, to look abroad to higher yielding currencies such as the kiwi and Australian dollars.

"The New Zealand dollar is at the whim of these huge stimulus programmes," says Stuart Ive, senior trader at HiFX. "There's a near and present threat from Japan, that they will start searching for yield."

The kiwi will likely extend its gains against the yen "barring the Reserve Bank reducing the interest rate yield to try to deter some of these inflows", he says.

The gap between the yield on New Zealand 10-year government bonds and comparable 10-year Japanese debt has widened to 288 basis points from 275 points at the start of the year.

Bernanke speech

For this week, traders are awaiting a speech by US Fed chairman Ben Bernanke around mid-morning New Zealand time tomorrow at a 2013 Financial Markets Conference in Atlanta, Georgia entitled Stress-Testing Banks: What Have We Learned?

The speech could be an opportunity for Mr Bernanke to comment on the outlook for quantitative easing after weak non-farm payrolls last week. Investors will get a full update of the Fed's thinking when the Federal Open Market Committee releases its review on Thursday.

Mr Bernanke "may or may not stick with the story that QE will remain," says Imre Speizer, senior markets strategist at Westpac Banking Corp. "The FOMC minutes will put a bit more of a microscope on what's going on with the QE plan."

The kiwi "has strong momentum" at present, he says.

Also on Thursday, Australia releases employment data for March, which is expected to show that economy shed 5000 jobs after a stonking 71,500 were added the previous month. Unemployment probably held at 5.4 percent, based on a Reuters survey.

The thinking of the Reserve Bank of New Zealand gets an airing at 4pm today, when deputy governor Grant Spencer is scheduled to deliver a speech on housing's role in the New Zealand economy. The bank has a paper out for feedback on the use of macro-prudential tools such as controls on loan-to-value ratios.

The TWI is now about 3 percent above the average 75.5 level for the second quarter that the Reserve Bank forecast in its March 14 monetary policy statement, when it highlighted the dilemmas of making a policy response.

Intervention may only come if currency gains are out of proportion to the economy's strength or meet the RBNZ's test for an unruly market.

Mr Speizer says apart from the yet-to-be quantified impact of drought, the New Zealand economy is outperforming major economies such as the US and Japan so an out-performing currency "kind of makes sense".

The only other important local economic release is the Quarterly Survey of Business Opinion, scheduled for release tomorrow.

(BusinessDesk)