NZ Dollar Outlook Kiwi may stall this week as investors weigh future interest rate path

Monday 19th May 2014

The New Zealand dollar may remain relatively unchanged this week as investors weigh the potential for a slower pace of interest rate increases than previously expected.

The local currency may trade between 85 US cents and 87.40 cents this week, according to a BusinessDesk survey of 11 traders and strategists. Six predict the kiwi will remain neutral this week, while two pick it to increase and three say it may decline. It recently traded at 86.35 US cents.

New Zealand's central bank was the first in the developed world to start hiking its benchmark interest rate this year in an attempt to dampen inflationary pressures from the rebuilding of earthquake damaged Christchurch, increased migration, housing shortages in Auckland, and booming commodity prices. Some investors are reassessing the future pace of hikes on signs of softer commodity prices, a slower rebuilding of Christchurch, some weakness emerging in China and an elevated currency.

"Maybe some people have got too much built into their rate hikes," said Tim Kelleher, head of institutional foreign exchange sales at ASB Bank in Auckland. ASB expects the Reserve Bank to lift the official cash rate at meetings in June and December, taking the key rate to 3.5 percent by the end of the year. The median expectation in a Reuters poll of economists is for the benchmark to reach 3.75 percent by December.

The kiwi "is looking a bit heavy", Kelleher said. "If we can break through 86 US cents I think we can keep going" down.

Improvements in the US economy, which are underpinning the greenback, will probably cancel out the effects of any upbeat local data, traders said.

In New Zealand this week, traders will be eyeing Fonterra Cooperative Group's latest fortnightly GlobalDairyTrade auction early Wednesday morning where prices may start to stabilise after declining on higher-than-normal volumes toward the end of the season.

Migration data for April due out later that morning will be closely watched after annual net immigration reached its highest in 11 years in March. In last week's budget, the Treasury raised its forecast for annual net immigration to peak at 38,000 in the second half of this year, up from an earlier estimate of 26,000.

On Thursday, the Reserve Bank publishes its quarterly survey of inflation expectations and the latest ANZ-Roy Morgan Consumer Confidence report is released.

Elsewhere, central banks will provide much of the news flow. The Federal Reserve publishes the minutes to its last meeting on Thursday morning New Zealand time and seven different Fed presidents are scheduled to talk about the economy or monetary policy this week, including chair Janet Yellen.

Still, Yellen's speech could reveal the least as it is only a commencement speech at New York University where she will be reading from a prepared text and not taking any questions from the audience, Kathy Lien, managing director of BK Asset Management in New York, said in a note.

The Bank of Japan is expected to keep monetary policy unchanged when it meets on Wednesday, and traders will also be eyeing data on the country's trade balance and manufacturing.

In Australia, the Reserve Bank of Australia publishes the minutes from its last meeting tomorrow and a consumer confidence survey is released on Wednesday.

The Bank of England also publishes the minutes of its last meeting this week, and traders will be eyeing releases on UK inflation, retail sales and revisions to first quarter growth.

In China, the focus will be on the HSBC flash performance of manufacturing index on Thursday for signs of a slowdown in Asia's largest economy. A report over the weekend showed Chinese new home prices weakened in April, raising concerns about a deflating property bubble.

Given increased speculation the European Central Bank may ease policy at its meeting next month, traders will be eyeing the input and output price components of euro zone purchasing managers surveys later this week.

BusinessDesk.co.nz

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