NZ Dollar Outlook: Kiwi may fall as investors ponder strength of economy

Monday 12th November 2012

The New Zealand dollar, trading near a three-week low, may fall further amid concerns last week's jobs data shows the domestic economy is struggling, putting the focus on upcoming figures including retail sales this week.

The kiwi dollar recently traded at 81.45 US cents, down from81.67 cents in late New York trading on Friday. Traders say 81 cents is the next key support and is a level it hasn't broken below since Sept. 11. Five of six traders and strategists in a BusinessDesk survey say the kiwi may weaken this week.

As at its September monetary policy statement, the Reserve Bank had economic growth of 0.4 percent pencilled in for the third quarter after growth in the second quarter beat its estimate at 0.6 percent. But figures last week showed unemployment climbed to a 13-year high of 7.3 percent, stoking concern the economy has lost pace. Retail sales for the third quarter, due on Wednesday, are expected to have risen 0.5 percent, down from the second quarter's 1.3 percent pace.

"After the employment data last week, nothing is going to look positive enough," said Alex Sinton, senior dealer at ANZ New Zealand. "There's further downside for the kiwi."

Retail sales are followed by the NZ Performance of Manufacturing Index on Thursday which ANZ forecasts remained below 50 in October, meaning the sector was still in contraction.

Third-quarter gross domestic product isn't released until Dec. 20 and the Reserve Bank will have updated its forecasts before then with the next MPS on Dec. 6. Markets are pricing in a 22 percent chance of a cut to the official cash rate at the central bank's next meeting, based on the Overnight Interest Swap curve.

"There's going to be underlying scepticism about how well the New Zealand economy is performing," said Dan Bell, strategist at HiFX. "Overall it continues to look like (third quarter growth) was pretty average." He doubts governor Graeme Wheeler will move on interest rates on Dec. 6.

Traders took some heart over the weekend at figures showing China's export growth accelerated in October while its trade surplus grew to a four-year high US$32 billion. But import data was less impressive, raising questions about continued demand for goods from Australia and New Zealand which count China as biggest and second-biggest export market respectively.

This week also heralds the change to Chinese leadership as the Communist Party meets to decide the make-up of its central committee.

In the US, the Federal Open Market Committee minutes are released on Wednesday but the biggest theme from the world's largest economy will be whether Washington can find a way to agree on dealing with the fiscal cliff, which if left untended will see fiscal spending slashed and the economy likely heading back into recession.

"There's some talk a fiscal cliff deal can be done," ANZ's Sinton said. "It's all about implementation. Politicians can say an awful lot."

Last year the kiwi dollar sold off after Republicans in the Congress held off on agreeing to lift the debt ceiling to ensure federal services could still be paid for. America's credit rating was cut by Standard & Poor's. Ironically, the greenback tends to rise in the face of US economic woes, which drive investors towards the world's reserve currency and US Treasuries.

In Europe, Greek politicians will vote today on the country's 2013 budget -- which includes more austerity measures, though it may be several more weeks until Greece's international lenders transfer fresh bailout funds. EU finance ministers await a report on the country's compliance with bailout terms.

Globally this week "is looking like more of a risk-off scenario, but not intense," said Derek Rankin, of Rankin Treasury Advisory.

He's expecting buying interest from Europeans in both the kiwi and Australian dollars as investors seek the relative stability and higher yields on offer down under.

The kiwi dollar last traded at 64.03 euro cents from 64.06 cents on Friday in New York. It has traded in a range of about 62.20 euro cents to 65 cents since late August.

BusinessDesk.co.nz

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