New Zealand's Dollar May Stall Even If Central Bank Boosts Rate, UBS Says

New Zealand’s dollar may fail to rally even if the nation’s central bank increases borrowing costs, according to UBS AG.

The kiwi has dropped 7 percent this year against the dollar on concern Europe’s sovereign-debt crisis will slow the global economic recovery. A signal from the Reserve Bank of New Zealand that the next increase in the official cash rate may be months away will probably prevent a currency rally, Geoffrey Yu, a London-based strategist, wrote in a research note today.

“A wait-and-see mode may be appropriate,” Yu wrote. “It’s unlikely that the Reserve Bank of New Zealand will provide a hawkish outlook, and this may support the view that the New Zealand dollar would remain a sell, in particular versus the U.S. dollar.”

An increase in borrowing costs doesn’t always translate into a stronger currency, Yu wrote, citing a “wave of selling” after the Reserve Bank of Australia’s rate increase in April. The kiwi’s performance depends on market consensus, guidance from the central bank and risk sentiment, he wrote.

Jane Foley, London-based research director at Forex.com, said in a research note today that a New Zealand rate increase “will not guarantee a sustained positive reaction” if demand for assets related to economic growth is low.

New Zealand’s central bank will probably raise its benchmark interest rate tomorrow for the first time in three years, judging that inflation poses a bigger risk to the economy than any fallout from Europe’s debt crisis. Governor Alan Bollard will increase the official cash rate to 2.75 percent, from a record low 2.5 percent, according to 13 of 15 economists in a Bloomberg News survey. Two expect no change.

Kiwi Versus Greenback

The kiwi, as New Zealand’s currency is known for the image of the bird on the NZ$1 coin, climbed 0.8 percent to 67.34 U.S. cents at 10:49 a.m. in New York, from 66.72 yesterday. It appreciated 0.5 percent to 61.33 yen.

The uncertainty stemming from the sovereign debt crisis in Europe and its impact may make New Zealand’s central bank more restrained in its growth outlook, according to Yu. He forecast the kiwi will trade on appetite for higher-yielding assets.

“According to our own measures, risk sentiment is unlikely to improve soon,” he wrote. “We expect a further adjustment in global growth expectations to the downside.”

Asia-Pacific policy makers from Indonesia to Thailand to the Philippines have kept interest rates unchanged this month on concern Europe’s fiscal crisis will hold back economic growth. Australia’s central bank on June 1 kept its overnight cash rate target unchanged at 4.5 percent, pausing after six increases since early October.

New Zealand’s inflation is expected to accelerate to 5.9 percent in the year ending March 31, the Treasury said in forecasts published with the budget.

Bollard has kept borrowing costs unchanged since April 2009 to aid a recovery from the nation’s worst recession in three decades. The decision on policy will be announced at 9 a.m. tomorrow in Wellington, New Zealand.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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