NZ Dollar Outlook: Kiwi may decline this week as RBNZ seen easing

Monday 8th June 2015

The New Zealand dollar may fall this week as traders bet the Reserve Bank could reduce interest rates at its meeting on Thursday, or at least signal that rates are on their way down in the near future, diminishing the yield appeal of the local currency.

The kiwi may trade between 67.75 US cents and 74 cents this week, according to a BusinessDesk survey of 10 currency analysts. Eight expect the kiwi to fall and two say it may rise. It was recently trading at 70.45 US cents.

Reserve Bank governor Graeme Wheeler will come under intense scrutiny as financial markets remain divided on whether he is likely to reduce interest rates in this week's monetary policy statement amid weaker prices for dairy products, the nation's largest commodity export, and low inflation, but as concern about the high level of the kiwi dollar abates following its recent decline. Six of 16 economists expect the RBNZ to cut by 25 basis points this week, one points to a cut in September, while others say the next move is likely to be a hike next year.

Traders are more aggressive in their expectations for a cut, pricing in a 43 percent chance of a reduction this week, based on the overnight interest swap curve, and 46 basis points of cuts in the next 12 months. Meanwhile, speculative investors are holding the biggest net short position in the New Zealand dollar on the Chicago Mercantile Exchange since the series began in 2003. A short position is a bet a currency will fall in value.

"The RBNZ's June monetary policy statement and official cash rate decision will be more intensely scrutinised than normal, largely because of differing opinions on what the bank will/should do at this point in time," Robin Clements, an economist at UBS New Zealand, said in a note.

"The most aggressive option we consider possible (say, 25 percent odds) would be for the RBNZ to cut the OCR 25 basis points and to flag that there could be more to come. We see the most likely outcome (say, 50 percent odds) being some form of no change in the conditional easing bias. This scenario would likely be a disappointment for markets on the day but, by preserving the risk of a cut, would allow markets to continue pricing in cuts."

The case for rate cuts has been gaining ground since the central bank and the government stepped up measures to try and dampen rising house prices in Auckland, which were previously seen as an impediment to interest rate cuts.

Tomorrow, state valuer Quotable Value will publish its latest monthly housing data for May. Realtor Barfoot & Thompson last week said its data showed Auckland house prices and sales continued to increase in the month, with the average sales price rising to a new record.

Other reports scheduled for release this week include the government's financial statements for the 10 months through April tomorrow; electronic cards data for May on Wednesday; and May food prices and manufacturing on Friday.

Elsewhere, traders will be eyeing data for May on Chinese trade, inflation, retail sales, loans, industrial production, fixed asset investment and producer prices. China is New Zealand's largest trading partner.

Australian markets are closed today for the Queen's Birthday public holiday. Australia has reports on business and consumer confidence due this week, as well as employment data. Australian Reserve Bank governor Glenn Stevens is giving a speech to the Economic Society of Australia in Brisbane on Wednesday.

In the US, the focus will be on May retail sales data and consumer confidence.

BusinessDesk.co.nz

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