NZ Dollar Outlook: Kiwi may climb after Fonterra increases pay-out, IMF report

Monday 9th November 2009

The New Zealand dollar may climb this week after Fonterra Cooperative Group increased its forecast pay-out to dairy farmers, boosting optimism about the country’s economic recovery.

Five of seven economists and strategists in a BusinessWire survey predict the kiwi will rise this week, following the Fonterra announcement and reports the U.S. dollar is still over-valued. One said the currency may trade in a volatile range this week with a bias towards heading lower, while the last forecasts the kiwi will ease this week. Fonterra boosted its forecast pay-out to farmers 19% to $6.05 after dairy prices surged higher as buyers restocked their depleted inventories.

The rise will add an estimated $1.2 billion to the economy, according to ANZ National Bank economists, helping underpin the economic recovery and encouraging investors to seek out higher yields in New Zealand. The kiwi climbed 1.3% immediately after the announcement and recently traded at 73.32 U.S. cents from 72.71 cents on Friday in New York.

“The Fonterra announcement is a potentially big boost to GDP,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney. “It depends on what farmers do with the money – we’d expect some spread across paying down debt and buying new equipment, but if they spend it, it will lift the economy more than the Reserve Bank forecasts.”

Trinh expects the kiwi will continue to climb this week, with a cap around 75 U.S. cents.

She doubts it will continue with last week’s downward trend, and recommends investors buy on dips. A weak greenback will underpin support for the kiwi this week with sentiment turning against the world’s reserve currency after an International Monetary Fund report said the U.S. dollar was “still on the strong side”.

This follows on from comments by the Federal Open Market Committee last week that the Fed will keep interest rates lower and for an extended period than anticipated, according to Ben Potter, research analyst at IG Markets in Melbourne.

“There’s quite a bit of negativity around the U.S. dollar at the moment,” Potter said. “Any remaining strength in the U.S. dollar is going to be the main driver of forex markets this week.”

Potter said the kiwi will struggle to break higher 74.20 U.S. cents this week, with good support around 73.10 cents to 73.20 cents.

Retail sales probably grew 0.4% in September from the previous month, according to a Reuters survey.

Still, Robin Clements, economist at UBS NZ, said the quarterly numbers “might be a bit of a disappointment” and could weigh on the currency this week.

He predicts the kiwi dollar will trade in a choppy range this week, and faces a negative bias against the Australian dollar. The kiwi climbed to 79.62 Australian cents from 79.25 cents on Friday in New York.

Imre Speizer, markets strategist at Westpac Banking Corp., said the kiwi dollar will probably gain early in the week on the back of the strong Fonterra announcement, but will ease off at the latter end as investors realise New Zealand’s central bank is following a different monetary policy to its commodity currency peers.

“The Reserve Bank is going to stick to its path, which is a different path to other commodity countries,” Speizer said. “It’s not going to have yield support in its favour.”

Four of seven strategists surveyed expect the kiwi will gain on a trade-weighted basis this week, with a weaker U.S. dollar driving up demand for higher yields. One predicted it will trade in a range this week, while two others expect it to ease.

The New Zealand dollar rose to 65.52 on the trade-weighted index, or TWI, a measure of the currency against the greenback, euro, pound, yen and Australian dollar, from 65.12 on Friday in New York, and was little changed at 65.81 yen from 65.85 yen. It gained to 49.31 euro cents from 48.80 cents on last week and advanced to 44.08 pence from 43.74 pence.

On the data radar this week will be Australia’s unemployment data out on Thursday and Germany’s Zew survey of business confidence on Tuesday.

Central bank Governor Alan Bollard will give a press conference on Wednesday after he releases the bank’s financial stability report and Reserve Bank will give an update on non-resident bond holdings for October on Friday.

Businesswire.co.nz

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