NZ Dollar Outlook: Analysts split on kiwi's direction as RBNZ set to cut interest rates

Monday 7th September 2015

Analysts are split on the direction of the New Zealand dollar this week because of the risk that the Reserve Bank signals the economic outlook isn't as grim as some expect, even as it cuts interest rates.

The kiwi may trade between 61 US cents and 65 cents this week, according to a BusinessDesk survey of 13 currency analysts. Six see the kiwi rising, six say it will probably drop while one expects it to remain largely unchanged. It recently traded at 62.74 US cents.

Reserve Bank governor Graeme Wheeler is widely expected to reduce the benchmark interest rate by a quarter point to 2.75 percent on Thursday as economic growth slows following a slump in dairy prices, the nation's largest export commodity. Still, he may catch some off guard with a more sanguine view of the outlook, given dairy prices have started to pick up, and other areas of the economy such as meat, fruit and tourism exports remain strong, aided by a decline in the local currency.

"I definitely think we will get a cut," said Tim Kelleher, head of institutional FX sales at ASB Bank in New Zealand. Still, "there is a risk, not that they don't cut further down the track, but I think they will just say we have done enough at this point in time, we are going to have a look-see. They will want to keep their ammo dry in case things do get worse.

"If that's the case, I think there's a risk you will see some short covering in the kiwi afterwards," Kelleher said, referring to the likelihood speculative traders who had bet on the currency's decline are forced to buy it back to stem their losses.

However, concerns about global growth may prompt investors to retreat to safety, which would sap demand for higher-risk currencies such as the kiwi.

Today, all eyes will be on Chinese equity markets which will resume trading this afternoon after a four day break, following previous volatility. China’s stock markets were closed last Thursday and Friday for ceremonies to mark the end of World War II. Ahead of the resumption of trade, People’s Bank of China Governor Zhou Xiaochuan said the rout in local stocks was near an end.

"If equities keep getting sold off, then kiwi will go lower regardless because it's a risk off thing," Kelleher said.

Releases scheduled in New Zealand this week includes a second quarter manufacturing survey; August data on house sales, electronic card spending, food prices and manufacturing activity; and a July accommodation survey.

In Australia, the main focus will be on August employment data released on Thursday. Australia also has consumer and business confidence surveys and several speeches by Reserve Bank of Australia officials.

Given concerns about a slowdown in China, data released this week on trade, inflation, producer prices, retail sales, industrial production and fixed asset investment will be closely watched.

Elsewhere, US markets are closed today for a Labor Day public holiday. In the UK, the Bank of England is expected to keep interest rates unchanged at its review on Thursday.

BusinessDesk.co.nz

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