NZ Dollar Outlook: Kiwi may fall on US rate hike bets; Budget, milk forecast loom

Monday 23rd May 2016

The New Zealand dollar may decline this week as the greenback powers higher on the back of encouraging comments on future interest rate hikes from Federal Reserve officials.

The local currency may trade between 66.17 US cents and 68.80 cents this week, according to 10 analysts in a BusinessDesk survey. Six expect the kiwi to decline, two bet it will gain and two say it will remain largely unchanged. It recently traded at 67.75 US cents.

The US dollar index, which measures the greenback against a basket of currencies, has jumped almost 3 percent this month amid growing expectations that the Fed may hike interest rates as soon as next month, increasing the lure of the nation's currency. Last week's release of the minutes to the Federal Reserve Open Market Committee's April meeting showed the central bank was closer to hiking rates than traders had thought, prompting them to increase their bets and stoking demand for the greenback. That sentiment may be further entrenched this week with several Fed officials scheduled to speak, including chair Janet Yellen.

"The Fed recently has taken quite a change in tack. Over the last two to three weeks, we have seen quite a difference in their outlook," said Sheldon Slabbert, sales trader at CMC Markets New Zealand. "That is forcing a rebalancing in the interest rate differentials between kiwi and the US, so the US dollar really is the driving factor currently. Kiwi is facing a bit of pressure."

On Friday, Yellen will speak with Harvard Professor Gregory Mankiw in Massachusetts.

First, other Fed officials will take the stage including St Louis Fed President James Bullard in Beijing, San Francisco Fed's John Williams, and Philadelphia Fed's Patrick Harker, today; Dallas Fed's Robert Kaplan, on Wednesday; and Fed Governor Jerome Powell on Thursday. That follows upbeat comments from Fed officials last week, including New York Fed President William Dudley.

"I think nobody is staying at home this week - they are all out!," said CMC's Slabbert. Traders will be looking to see if this week's Fed speakers are equally as hawkish as those over the past couple of weeks, he said.

"The Fed is changing tack and that is worth noting. That could catch quite a few in the market off guard," he said.

Slabbert noted that the Fed's balance sheet showed money supply has been contracting over the last few months, which he said is normally a lead up to a rate hike.

A stronger greenback may weigh on commodities, providing a further headwind for the kiwi, he said.

Locally, New Zealand publishes April merchandise trade data on Wednesday and the government's 2016 Budget is announced on Thursday.

Fonterra Cooperative Group is holding its board meeting this week and may release its initial farmgate milk price forecast for the 2016/17 season on Thursday.

Dairy market analysts and rural economists surveyed by BusinessDesk expect a median forecast for next season of $4.60/kgMS. That compares with a $3.90/kgMS forecast payout for the 2015/16 season and $4.40/kgMS in 2014/15. DairyNZ estimates the average farmer required $5.25/kgMS to cover costs this season and hasn't yet finalised a break even price for next season.

Dairy products are New Zealand's largest commodity export and a global oversupply and weak demand has dented prices, which has led to an increase in dairy farm debt and much angst about the future outlook for the industry.

In Australia this week, Reserve Bank governor Glenn Stevens is scheduled to speak in Sydney on Tuesday and assistant governor, financial markets,Guy Debelle speaks in New York later in the week. Private capital expenditure data for March is published Thursday.

Elsewhere, Japan has inflation and trade data, and Europe has manufacturing and services data and business sentiment. The UK and the US both have second readings of first quarter GDP.

BusinessDesk.co.nz

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