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NZ Dollar Outlook Kiwi may decline on end to US stimulus, Chinese slowdown

Monday 1st July 2013

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The New Zealand dollar may decline this week on speculation about the removal of asset purchasing stimulus in the US and on concern Chinese growth may be faltering.

The local currency may trade between 75 US cents and 80 cents this week, with a lower bias, according to a BusinessDesk survey of nine traders and strategists. Five expect the kiwi to end lower, two expect a rise while two said it would remain steady. The kiwi recently traded at 77.55 US cents from 77.38 cents at the New York close and 78.01 cents at 5pm in Wellington on Friday.

The local currency has fallen about 4 percent since Federal Reserve chairman Ben Bernanke last month said the Fed may start tapering its US$85 billion a month bond buying programme this year and end it in mid-2014. The asset purchases, which aim to stimulate growth in the world's largest economy, have debased the greenback and bolstered supported for currencies such as the New Zealand and Australian dollars.

"The market is overwhelmingly negative for the New Zealand dollar and the Australian dollar," said Derek Rankin, director at Rankin Treasury Advisory. "It means there are more sellers than buyers and it just keeps tripping through support levels. People think it is going to go lower and therefore they look for reasons why it will."

In the US this week, traders will closely watch reports on manufacturing and the labour market to gauge the level of activity in the world's largest economy.

"For this week, general sentiment towards the US dollar will remain the key source of direction for the NZD/USD," Bank of New Zealand strategist Mike Jones said in a note.

On Friday data will probably show June US non-farm payrolls at 165,000, down 10,000 from May while the unemployment rate is predicted to fall to 7.5 percent from 7.6 percent, according to Reuters polls. Bernanke has made 7 percent the target for beginning to ease its stimulus efforts.

Reports on June manufacturing activity in China and the US today will be closely watched.

Growth in China's vast factory sector may have stalled in June as domestic and external demand weakened. China's official Purchasing Managers' Index may have fallen to the neutral level of 50 demarcating expansion from contraction, down 50.8 in May, according to a Reuters poll. It last showed a contraction in September. The report will be released about 1pm New Zealand time.

"The Chinese economy is going through some difficult times, slowing down, and they have had some liquidity issues in their banking system, so people are looking sideways at China," Rankin said.

The US Institute of Supply Management's June Manufacturing Index should rise modestly to about 50.5, up from a near four-year low of 49.0 last month, according to Reuters.

There is little data scheduled for release in New Zealand this week. The ANZ commodity price report due tomorrow is likely to see the index stay near all-time highs, UBS New Zealand economist Robin Clements said in a report. That will be followed by the GlobalDairyTrade auction results early Wednesday after prices rose in the June 18 sale following three straight declines.

Traders will be looking to central banks in Australia, England and Europe for indications of the direction of future monetary policy, although the banks are unlikely to alter their policy stances this week.

Tomorrow, the Reserve Bank of Australia will probably leave its benchmark interest rate at a record low 2.75 percent following its monthly meeting. Some 21 economists surveyed by Reuters expect the rate will remain unchanged while two expect a cut to 2.5 percent.

The New Zealand dollar may rise above 85 Australian cents should the bank confirm its easing bias and reiterate that the Aussie could weaken further, Sharon Zollner, senior economist at ANZ New Zealand, said in a report.

Further detail on how the Australian economy is tracking may come with retail sales and the trade balance on Wednesday. Retail sales are expected to rise 0.3 percent in May from 0.2 percent in April, while the trade balance is forecast at zero from A$28 million. A report Thursday may show building approvals slid 1.5 percent in May from a positive 9.1 percent in April, according to Reuters

Meanwhile new Bank of England governor Mark Carney isn't expected to make any changes to monetary policy on Thursday, according to a Reuters poll of about 60 economists. Carney, Canada's former central bank chief, chairs his first Monetary Policy Committee this week.

The bank's policy of not issuing a statement on a 'no change' decision means traders may have to wait for the meeting minutes on July 17 to get an insight into the new governor's thinking, BNZ's Jones said.

Only two economists polled by Reuters saw any change to policy, both expecting a further 25 billion pound injection to the quantitative easing programme, which the committee last changed a year ago. Economists expect no shift in the benchmark interest rate from the record low 0.5 percent it was chopped to four years ago, according to Reuters.

The vast majority of more than 60 economists polled by Reuters don't expect the European Central Bank to cut its main refinancing rate again on Thursday to below the current 0.5 percent. Bank chief Mario Draghi is likely to continue to emphasise that policy may remain loose for some time and the bank stands ready to do more if needed, BNZ's Jones said.

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