Dollar outlook: Kiwi may fall amid soft employment, weak dairy prices

Monday 2nd August 2010

The New Zealand dollar will likely fall this week as softer employment data and declining dairy prices give the central bank room to pause on its current round of rate hikes.

Five of eight economists and strategists in a BusinessDesk survey predict the kiwi will fall against the US dollar this week with deteriorating economic data sapping investors’ optimism about New Zealand’s recovery.

The remaining three strategists expect the currency will trade in a range against the greenback, though one has a negative bias to his forecast.

The kiwi climbed to 72.68 US cents from 71.94 cents on Friday in New York after data showed China’s manufacturing sector kept growing last month, and allayed concerns about the health of the world’s third biggest economy. With a bank holiday in Sydney, investors won’t digest the Chinese data until Asian equity markets open.

Local unemployment data on Thursday is expected to show the jobless rate rose to 6.4% in the three months through June from 6% a quarter earlier, while private sector wage growth is expected to stay flat at 0.4% in the quarter. New Zealand’s unemployment rate climbed as high as 7.1% in the last three months of 2010 as companies laid off staff in response to the worst recession in 18 years.

“The household labour force survey is the most important piece of data this week, with a bounce back in the unemployment rate likely,” said Mike Jones, strategist at Bank of New Zealand.

“The economic news looks likely to confirm a slowing of the economy’s momentum,” giving credence to a pause from the central bank, he said.

Jones expects the kiwi to be sold on rallies this week as the currency, though it will probably find support around the 71/71.20 US cents region.

The local labour data comes ahead of US non-farm payrolls data on Friday which will likely show American employers shed 60,000 jobs last month. Last week, US Federal Reserve chairman Ben Bernanke told policy makers unemployment was the “most important problem” facing the economy, and has kept investors on their toes over the looming employment data.

Derek Rankin, director at Rankin Treasury Advisory, predicts the kiwi will trade in a range of 72 US cents and 74 cents this week with a downward bias as investors wait for the American employment data.

His negative outlook comes from the likely softening in commodity prices, with the ANZ Commodity Price Index out today expected to show the price of locally produced raw materials declined last month.

That comes ahead of Fonterra Cooperative Group’s online milk powder auction on Tuesday in the US, which is has been used as a proxy for New Zealand’s economic outlook, with dairy exports accounting for some 23% of the nation’s $40.7 billion worth of exports.

Khoon Goh, ANZ New Zealand’s head of market economics and strategy, said the Fonterra auction will probably have more impact on the currency this month after investors shrugged off a 15% decline in whole milk powder last month.

“It was a surprise that currencies didn’t react to the 15% decline, but the Reserve Bank firmly put dairy prices on the radar screen, so we can expect to see some reaction,” he said.

The Reserve Bank of Australia will review its target cash rate tomorrow, and is expected to keep rates on hold at 4.5%. With New Zealand’s central bank Governor Alan Bollard indicating a slower pace of tightening when he hiked the official cash rate a quarter-point to 3% last week, investors are expected to take advantage of Australia’s yield advantage, boosting the Australian dollar against its kiwi counterpart.

The RBA is expected to hike the benchmark interest rate 15 basis points over the coming year, according to the Overnight Index Swap curve, while the RBNZ is forecast to lift the OCR 79 points. The kiwi was little changed at 80.25 Australian cents from 80.17 cents on Friday in New York.

The kiwi will probably fall on a trade-weighted basis, according to five of eight strategists surveyed. The currency climbed to 67.51 on the TWI from 67.09 on Friday in New York, and edging up to 55.64 euro cents from 55.42 cents. It was little changed at 46.29 pence from 46.22 pence last week.

Tim Kelleher, vice president of institutional baking and markets at Commonwealth Bank of Australia, said the high leverage ratios allowed on yen-trading will end today, with traders forced to cap the ratio of debt used to boost bets to 50 times from 100 times. The leverage ratio will go down to 25 times next year. The kiwi rose to 62.75 yen from 62.10 yen on Friday in New York.

On the data radar this week is America’s ISM manufacturing survey today and housing data on Wednesday, while Australian retail sales and building data will also be of interest. Britain’s and Europe’s central banks will also review their benchmark interest rates this week.

Businesswire.co.nz

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