NZ Dollar Outlook Kiwi may fall as greenback shines, drought weighs

Monday 11th March 2013

The New Zealand dollar may fall this week, extending its decline in New York on Friday when US employment data added to signs the world's largest economy is reviving.

The New Zealand dollar recently traded at 82.06 US cents from 82.11 cents in New York on Friday, when it traded above 82.86 cents before the non-farm payrolls report. It may trade in a range of 81 cents to 83 cents this week, according to six strategists and traders in a BusinessDesk survey, with most calling it lower.

The New Zealand dollar fell below 82 US cents on Friday after figures showed US employment jumped by 236,000 last month, beating estimates, and the jobless rate fell to a four-year low 7.7 percent. Employment is one of the key measures watched by the Federal Reserve and the US Dollar Index rose to a seven-month high on speculation the end to quantitative easing by the Fed may be in sight.

Signs of a stronger US economy come as talk of drought in New Zealand clouds the outlook for a domestic economy that was otherwise heading for steady growth this year and heightens interest in Reserve Bank Governor Graeme Wheeler's monetary policy statement on Thursday, where he's expected to keep the official cash rate unchanged at 2.5 percent.

"Offshore traders are going to start to realise things are not that rosy in New Zealand, with the drought getting more and more attention," said Dan Bell, senior dealer at HiFX. "The US non-farm payrolls and drop in unemployment confirms there's a decent trend there. I don't think the US will be removing stimulus this year but the market is anticipating that in this data we're seeing."

Bell expects the kiwi will "slice through" key resistance at 81.80 US cents this week and reach as low as 81 cents.

The strength of the US dollar in the face of stronger US economic data is another sign that trading patterns evident since the Global Finance Crisis are starting to break down.

Typically in the past few years, the kiwi dollar has gained along with US stocks and better American figures because it has boosted investors' risk appetite. Conversely investors have tended to retreat to the greenback, the world's reserve currency, on the back of bad news including signs of a weak US economy.

"Since the beginning of February we've see this relationship of the last three to four years break down," said Imre Speizer, senior markets strategist at Westpac Banking Corp. "I believe it is early days of a change. If it continues the US dollar should outperform many currencies."

A recovery in the US economy may signal an end to the Fed's bond buying programme and cause it to turn off the printing presses which have weakened its currency.

New Zealand's drought is already prompting traders to take a different view of the nation's performance. Dairy product prices surged more than 10 percent in last week's GlobalDairyTrade auction with little positive impact on the kiwi.

"Normally a jump in dairy prices would shine through in the New Zealand dollar but it was attributed to a lack of supply," said Peter Cavanaugh, Senior Client Advisor at Bancorp Treasury Services. A number of technical indicators point to the threat of a strong US dollar, he added.

In a relatively quiet weak for economic data, Thursday may be the highlight, the MPS and Australian employment figures. UBS AG economists are forecasting Australia added 5,000 jobs last month while the unemployment rate edged up to 5.5 percent from 5.4 percent.

The RBNZ's Wheeler is likely to make some comment on the use of macro-prudential tools to target specific parts of the economy, though with a central bank paper on the issue out for comment, he's unlikely to say anything definitive, according to Derek Rankin, director at Rankin Treasury Advisory.

"Wheeler will probably want to maintain a steady course," Rankin said. "He will be worried about the Auckland property market and the Christchurch rebuild but conscious of the fact he doesn't want to get the exchange rate any higher."

Current levels for the kiwi provide an opportunity for exporters to get better cover, he added.

BusinessDesk.co.nz

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