Outlook: NZ dollar

The New Zealand dollar may weaken this week from a five-month low as concern about sovereign risk in Europe drives investors to the relative safety of the greenback and the yen.

The kiwi dollar will fall, potentially testing 68 U.S. cents this week, according to four of seven economists and strategists in a BusinessWire survey. Two see the kiwi trading around current levels and one predicts a gain, though "capped at 70 cents."

"The world is selling out of risk positions and getting involved in being safe," said Derek Rankin, director at Rankin Treasury Advisory Ltd. That's helping the U.S. dollar and the yen while commodities are "being sold" and the Australian and New Zealand dollars are driven down.

Crude oil fell to a seven-week low on Friday in New York as the greenback strengthened. The kiwi dollar fell today to a five-month low of 68.84 U.S. cents. A key support level is 68 U.S. cents, a level it hasn't breached since early September 2009.

Data out this week locally includes electronic card transactions on Wednesday and retail sales for December on Friday. Real Estate Institute figures on Friday may indicate the housing market remains subdued.

While sales are expected to have grown 0.5% in December, the electronic card transactions data may show a more subdued January, said Darren Gibbs, chief economist at Deutsche Bank in Auckland. "This week is going to be very much offshore driven," he said. New Zealand data will be "a bit on the soft side - encouraging people to think Bollard will not be tightening until the middle of the year."

The kiwi tumbled last week after figures showed the unemployment rate rose to a higher-than-expected 7.3%, suggesting there's little wage inflation for Reserve Bank Governor Alan Bollard to worry about.Tomorrow, Prime Minister John Key is scheduled to give a speech at the opening of the Parliament, with investors likely to pay close attention for clues to the direction of tax reform and plans to lift economic performance.

"Whatever tax changes he talks about, if it's negative for housing it's probably negative for the currency because it means there is less work for monetary policy to do," said Imre Speizer, strategist at Westpac.

In the U.S., investors will be awaiting testimony from Federal Reserve chairman Ben Bernanke which may help provide clues for the timing of the end to stimulus measures.

Finance minister from the Group of Seven industrialised nations, meeting in Canada over the weekend, pledged to continue supporting economic growth until there are clearer signs that recovery is underway. European leaders vowed to ensure Greece's fiscal woes remain under control.

"We suspect the fiscal woes of Greece, Portugal and Spain will remain the spotlight again this week, while investors wait for a concrete plan from the EU to tackle the crisis," said Danica Hampton, currency strategist at Bank of New Zealand. "Investors remain skeptical as to whether Europe can solve the crisis."

Also likely to weigh on the New Zealand dollar this week are concern about China's efforts to cool its economy and weaker U.S. equity markets, he said.

Rankin said when the world worries about risk, "everyone panics" but markets eventually start recovering again.

"The world needs to calm down - confidence has been shaken," he said. "It reminds you that the crisis has not gone away."

- BusinessDesk