NZ Dollar Outlook: Kiwi may gain as US interest rate outlook disappoints

Monday 14th December 2015

The New Zealand dollar may gain this week, underpinned by improved global dairy prices, local growth data and US dollar weakness.

The local currency may trade between 64.50 US cents and 69.50 cents this week, according to a BusinessDesk survey of 11 analysts. Eight expect the kiwi to gain while three bet it will decline. It recently traded at 67.15 US cents.

All eyes this week are focused on the Federal Reserve meeting, with 90 percent of economists in a Reuters poll predicting the federal funds rate will be raised for the first time since 2006, by a quarter point to 0.25-0.5 percent.

Given the hike is already widely expected, analysts will be most interested in the outlook and may be disappointed should chair Janet Yellen signal that any future gains will be gradual. Locally, expectations for improvements in the GlobalDairyTrade auction and third-quarter gross domestic product will bolster the kiwi dollar.

"The major thing clearly this week is going to be the Federal Reserve on Thursday - the market already has a hike priced in....Yellen tends to be a little bit more dovish in her tendencies and we may see that feed through into whatever statement follows on from the rate hike and I think could lead to a little bit of dollar weakness initially really on that basis," said Stuart Ive, senior dealer, foreign exchange at OMF.

At its last meeting, the Fed signalled interest rates were likely to rise once each quarter over the next year, and Yellen may highlight that further hikes are "strictly data dependent", Ive said.

"Any cautionary elements that come into this will see the market react by selling the dollar, at the moment pretty much everything has to be priced in so the danger is a potential to disappoint."

OMF estimates average prices on the GlobalDairyTrade auction overnight on Tuesday may increase 5-10 percent after Fonterra Cooperative Group reduced the volume of whole milk powder offered for sale, citing lower milk collection and sales through other channels.

New Zealand economic data scheduled for release this week includes Wednesday's third-quarter current account and Thursday's GDP. The country is expected to record a current account deficit of 3.5 percent of GDP, unchanged from the second quarter, according to a Reuters poll of economists. Third-quarter GDP is expected to accelerate to 0.8 percent, from a 0.4 percent pace in the second quarter, according to the poll.

Solid growth numbers will help underpin expectations that the Reserve Bank will hold interest rates in the future, although the report is likely to be overshadowed by the Fed statement as both are published on Thursday local time, Ive said.

On Tuesday, Treasury publishes the government's half-year fiscal and economic update where no significant changes to spending plans are expected.

Meanwhile, on Friday ANZ publishes its latest monthly survey of business confidence.

In Australia this week, the central bank publishes the minutes to its December meeting tomorrow, and a mid-year update of the Federal Budget is likely to show a deterioration due to lower commodity prices. Reserve Bank of Australia assistant governor financial markets Guy Debelle will speak at a conference in Sydney on Wednesday.

Elsewhere, Europe, the US and the UK release inflation data, while manufacturing data is released in Japan, the US and Europe, and employment data is released in Europe and the UK.

Meanwhile, the Bank of Japan is expected to keep policy unchanged at its meeting on Friday.

BusinessDesk.co.nz

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