NZ Dollar Outlook: Kiwi may gain as RBNZ seen keeping OCR attractive at 2.5%

Monday 7th March 2016

The New Zealand dollar may gain this week as economists bet the Reserve Bank will keep its benchmark interest rate on hold, underpinning the attractiveness of the country's yields as banks elsewhere move to negative rates.

The local currency may trade between 65.50 US cents and 69.50 cents this week, according to a BusinessDesk survey of nine analysts. Five expect the kiwi to gain, two bet it will decline, and two anticipate it will remain relatively unchanged. It recently traded at 67.90 US cents.

Reserve Bank governor Graeme Wheeler is expected to leave the benchmark at 2.5 percent in his monetary policy statement on Thursday, while keeping alive the prospect of lower rates in the future. That will ensure the country's rates remain attractive to global investors in an environment where central banks in Japan, Europe, Switzerland, Denmark and Sweden have introduced negative interest rates. The European Central Bank is expected to push its deposit rate further into negative territory following its policy review on Thursday and increase its monthly asset purchases.

"Globally there's a lot of negative interest rates now creeping into the market," said Stuart Ive, OMF senior dealer, foreign exchange. "The long and short of it is that 2.5 percent is going to attract investors given the current global situation. What this creates is an influx of hot money."

Should the kiwi break above 69 US cents, it could make inroads back up towards 72 cents, Ive said.

While low inflation and a struggling dairy sector were justifications for cutting rates, Wheeler will be concerned a cut would further stimulate a heated housing market, he said.

Meanwhile, an improvement in global risk sentiment, driven by higher commodity prices and better-than-expected gross domestic product data this year in Sweden, the US, Australia and Canada, was also stimulating demand for the kiwi as a currency exposed to global growth, Ive said, noting that a rebound in dairy prices isn't enough to offset the impact of a higher currency.

"You are getting a double hit - it really does put Governor Wheeler in pretty much a mission impossible position," Ive said.

An update on the dairy sector may come this week, with Fonterra Cooperative Group expected to review its forecast payout to farmers tomorrow. The country's dominant dairy processor currently expects to pay farmers $4.15 per kilogram of milk solids this season, below DairyNZ's $5.25/kgMS estimate for the average farmer to break even.

Data scheduled for release in New Zealand this week includes the fourth quarter economic survey of manufacturing tomorrow, electronic card spending for February on Wednesday, Real Estate Institute monthly house sales data and the January accommodation survey on Thursday, and the BNZ-BusinessNZ performance of manufacturing index for February and food prices for February on Friday.

Elsewhere, the Bank of Canada is expected to keep its benchmark interest rate on hold at 0.5 percent following its meeting on Wednesday.

China, New Zealand's largest trading partner, has data on trade, inflation and industrial production this week.

In Australia, surveys on business and consumer confidence are released, as well as data on January housing finance. Reserve Bank of Australia deputy governor Philip Lowe will give a speech on resilience and ongoing challenges tomorrow.

In the US, investors will eye comments from Federal Reserve Vice Chair Stanley Fischer and Fed Governor Lael Brainard who are both set to speak in Washington today, ahead of the Fed's two-day meeting beginning on March 15.

BusinessDesk.co.nz

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