Dollar outlook: RBA review, Fonterra auction key this week

Monday 31st August 2009

Tomorrow's Reserve Bank of Australia monetary policy review is expected to underpin the New Zealand dollar above 68 US cents, along with any signs from Fonterra’s latest online auction of another pick-up in the price of dairy products.

Four of seven economists and strategists in a BusinessWire survey predict the currency will trade in a tight range this week as the Australian central bank’s review leads sentiment for the trans-Tasman currencies. Two expect the kiwi to push higher this week, while one forecasts greater risks to the downside.

RBA officials have cautioned Governor Glenn Stevens against keeping rates too low for too long, in contrast to the New Zealand central bank’s stance that the official cash rate will remain at or below current levels until late next year.

The next clear steer for the kiwi will be next week's Reserve Bank of New Zealand monetary policy statement, in which Governor Alan Bollard told Radio New Zealand today that he would be “absolutely clear-cut" about his views.

Australia’s economy probably grew 0.6% in the three months ended June 30, according to a Reuters survey, after it recorded 0.4% growth in the quarter prior. The kiwi dollar fell to 81.18 Australian cents from 81.31 cents on Friday in New York.

“The kiwi dollar’s outlook depends on the RBA statement and how the Australian economic data comes out,” said Khoon Goh, senior markets economist at ANZ National Bank. “It’s quite clear the Australian economy is rebounding a lot more than we are in New Zealand.”

Goh said the currency faces downside risks this week after reaching a ceiling at the 69 US cents level last week. The New Zealand dollar slipped to 68.35 cents from 68.55 cents on Friday in New York.

Fonterra Cooperative Group will hold its latest online auction for milk powder on Wednesday morning NZ time, and a further gain should boost support for the kiwi dollar. Last month, the price of milk powder surged 26% and pushed the currency to a 10-month high.

“Expect some support after the Fonterra auction if that comes out stronger again,” said Darren Gibbs, chief economist at Deutsche Bank. The kiwi dollar could jump “50 basis points if the dairy prices gain by double-digit figures.”

Gibbs predicts the currency faces potential risks to the upside this week, with most data releases expected to show the global recovery is still taking place.

Today’s National Bank Business Outlook is also a key piece of data which could lend support for the kiwi dollar, according to Imre Speizer, currency strategist at Westpac Banking Corp. He predicts the series to show a net 20% of respondents expecting business conditions to improve over the coming 12 months, up from 19% in July.

Speizer expects the kiwi will gain this week, cracking the 69 US cents level it’s already tested six times.

“If it breaks through, that will take it to 70 US cents,” he said.

Three of seven strategists predict the kiwi will decline on a trade-weighted basis as the diverging approaches between the trans-Tasman central banks help push the Australia-New Zealand dollar cross lower.

The kiwi fell to 63.44 on the trade-weighted index, or TWI, of a basket of five trading partners' currencies, from 63.54 on Friday in New York.

“The central banks’ diverging policy should become particularly evident over the next ten days” after both banks have issued monetary policy statements, said Sue Trinh, senior currency strategist at RBC Capital in Sydney.

The European Central Bank will review its monetary policy on Thursday, and while it isn’t expected to move rates, traders will be watching for any comments by President Jean-Claude Trichet.

The New Zealand dollar gained to 47.88 euro cents from 47.77 cents on Friday in New York.

Meanwhile, the Democratic Party of Japan, led by Yukio Hatoyama, swept to power for the first time in 50 years, winning 308 of 480 lower house seats, according to public broadcaster NHK. The Nikkei 225 Index climbed 2.1% to 10750.02.

At the same time, yields on government bonds are expected to rise as the incoming government looks to raise money. The yield on two-year bonds rose two basis points to 0.635 while the 10-year bonds increased half a basis point to 1.32. The kiwi fell to 63.83 yen from 64.36 yen on Friday in New York.

On the data radar this week is a glut of employment statistics from the US, including non-farm payrolls on Friday. ANZ National Bank will also release its commodity price index on Thursday.

Businesswire.co.nz

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