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NZ Dollar Outlook: Kiwi basking in strong commodity prices

Monday 3rd May 2010

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The New Zealand dollar will likely press higher this week as strong commodity prices continue to underpin support for the currency, with milk prices under scrutiny in the latest Fonterra Cooperative Group online auction on Tuesday in the US. 

Five of seven economists and strategists in a BusinessWire survey expect the kiwi will gain this week, while the other two are picking a week of consolidation for the currency.  Fonterra’s online auction on Tuesday in the US will give the currency some direction as it capitalises on support for rising commodity prices. The average price of whole milk powder surged 21% to US$3,969 a tonne last month, its highest level since trading began on the globalDairyTrade platform in July 2008.  

“What’s driving the kiwi is all about commodities at the moment,” said Imre Speizer, markets strategist at Westpac Banking Corp. “I like the kiwi higher against everything this week.”  

Speizer said the currency is targeting 76 US cents, though it will have to get past 74 cents first, and he expects it to top out around 74.40 cents this week, with any dips a good opportunity to buy the kiwi. The kiwi recently traded at 72.77 cents from 72.91 cents on Friday in New York.  

Following the Fonterra auction, is the Household Labour Force Survey on Thursday, which economists expect will show the unemployment rate held at a 17-year high 7.3% in the first three months of the year, according to a Reuters survey. 

Robin Clements, economist at UBS New Zealand, said the market is already prepared for weak employment data, and if it comes out stronger than expected, it could stoke the prospect of June rate hike by the Reserve Bank of New Zealand.  

“If it turns out to show a surprise rise and unemployment is reversed, then the market will take that hawkishly,” Clements said. He predicts the kiwi will gain against the greenback this week. 

The Reserve Bank of Australia will review its target cash rate tomorrow, and markets are split as to whether Governor Glenn Stevens will hike the benchmark interest another 25 basis points this month, or in next month’s meeting. Traders are betting the RBA will hike interest rates by 97 basis points over the coming 12 months, according to the Overnight Interest Swap curve.

The RBA was the first G-20 nation to embark on tightening monetary policy last October after Australia avoided falling into a recession during the global financial crisis.  

Derek Rankin, director at Rankin Treasury Advisory, said the RBA is already close to being back to normal interest rates, and investors are gearing up for the RBNZ to start hiking the official cash rate. Governor Alan Bollard last week said he would move to lift rates “over the coming months” with the economy bouncing back on a better-than-expected recovery in exports. 

“The RBA is starting to get closer to average rates, and over the next six months the programme in New Zealand should see a rise in rates,” Rankin said.  

Investors are betting the RBNZ will hike the OCR by 197 basis points over the next 12 months, according to the OIS curve, and Rankin said exporters to Australia are “taking cover as they start to see rates moving higher.”  

Weighing on the Australian currency was the news that the People’s Bank of China increased its required reserve ratio for commercial banks by 50 basis points, its third hike this year, as the central bank continues to take some heat from the recovery in China.

The kiwi climbed to 78.86 Australian cents from 78.11 cents on Friday in New York.  

All seven strategist surveyed by BusinessWire expect the kiwi dollar will hold up and push higher on the cross-rates this week. The currency rose to 67.98 on the trade-weighted index, or TWI, a measure of the currency against a basket of trading partners, from 67.79 on Friday in New York.  

The euro stabilised over the weekend after Greece announced it would take on more austerity measures after Eurozone finance ministers agreed to a new, and bigger, rescue package for the debt-stricken nation. The deal, estimated to be worth some 120 billion euros, is expected to prevent Greece from defaulting, though it still needs to be ratified by the various European nations’ parliaments.

The kiwi advanced to 54.87 euro cents from 54.64 cents on Friday in New York.  The pound will remain under pressure ahead of the British national election on Thursday, and an expected hung parliament should delay the steps the next government will have to introduce to slash debt.

The kiwi increased to 47.68 pence from 47.40 pence on Friday in New York.  Japanese markets are closed for three days this week as the world’s second largest economy celebrates Golden Week, and the kiwi fell to 68.47 yen from 68.75 yen on Friday in New York.  

On the data radar this week is the US non-farm payrolls on Friday in the States, which is expected to show the world’s largest economy added 200,000 jobs in April, while American and European manufacturing data will also be under scrutiny. The European Central Bank meets this week, but is unlikely to change its policy setting.  

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