NZ Dollar Outlook Kiwi may lack direction as investors weigh NZ, US forces

Monday 10th June 2013

The New Zealand dollar may struggle for direction this week as investors weigh the possibility of a higher interest rate track in New Zealand against signs of recovery in the US.

The kiwi may trade between 77 US cents and 81 cents this week, according to a BusinessDesk survey of six traders and strategists who were split on the local currency's likely direction. It recently dropped to 78.65 US cents, from 78.85 cents in New York on Friday, and earlier touched 78.20 cents, the lowest since July 2012.

The New Zealand dollar has weakened after an upbeat jobs report in the US boosted optimism about the outlook for the world's largest economy and spurred demand for the greenback. Investors await comment from Reserve Bank governor Graeme Wheeler Thursday on the likely track of the official cash rate, which at 2.5 percent is higher than any members of the G10, a group of the 11 wealthiest nations of the International Monetary Fund. Since his last decision, the New Zealand dollar has weakened, the government has the potential for looser fiscal policy and Fonterra has promised farmers a larger payout.

"The mood is negative but the Reserve Bank, we think, will be a bit more hawkish than it was in April," said Imre Speizer, chief currency strategist at Westpac.

Wheeler will keep the official cash rate unchanged, according to a Reuters survey of 15 economists. He will raise the rate to 2.75 percent in March 2014 and to 3 percent in June, based on the median estimates.

The greenback gained against most of its peers after a report in the US on Friday showed employment growth was higher than expected last month, increasing speculation the Federal Reserve may start winding back its US$85 billion a month asset purchase programme, which has weighed on the US dollar.

Former Federal Reserve chairman Alan Greenspan told CNBC on Friday that the central bank should taper its bond buying even if the US economy is not ready for it.

Signs of further improvement in the US economy may emerge on Friday with a report on retail sales expected to show spending increased 0.4 percent in May, up from 0.1 percent, according to Reuters.

Also weighing on the New Zealand dollar this week, reports from China, New Zealand's second-largest largest trading partner, showed signs of increasing weakness.

In New Zealand, a Quotable Value report today showed property values increased 7.1 percent in the 12 months through May, confirming the Reserve Bank's concerns about a housing bubble. On Friday, a Real Estate Institute of New Zealand report will likely show sustained strength in house prices in May.

The Reserve Bank plans to use new macro-prudential tools to restrict the volume of low equity mortgages as pressure in the housing market poses a risk to financial stability. Most economists expect the central bank will also raise the benchmark interest rate next year in part to contain the housing market in Auckland, where a supply shortage has driven up prices, and Christchurch, embarked on a massive rebuild after the earthquakes.

On Wednesday, a report may show consumer confidence spurred ongoing growth in electronic card transactions. A separate release may show a weakening in the local currency boosted the Performance of Manufacturing Index for May.

In Japan, the government today said the economy expanded at a 4.1 percent annual pace in the first quarter, beating the 3.5 percent pace expected in a Reuters poll. The Bank of Japan is scheduled tomorrow to make a decision on its benchmark rate.

In Australia, a slew of reports are due following the Queen's Birthday holiday today. They include May business confidence and April home loans tomorrow and consumer sentiment on Wednesday. On Thursday reports will show employment and unemployment data for May.

BusinessDesk.co.nz

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