Dollar may fall on weakening labour market

By Paul McBeth

Monday 2nd February 2009

The New Zealand dollar may extend its decline amid speculation figures this week will show a steep jump in unemployment, signaling the economy is in for a prolonged slump.

The jobless rate rose to 4.7% in the fourth quarter, from 4.2% three months earlier, according to a Reuters survey. The figure are due Thursday. Rising unemployment is set to become one of the biggest issues for economies worldwide this year as Japan, the US and Europe move into synchronized recession. More than 70,000 jobs were shed on a single day last week and figures in the US are expected to show the unemployment rate in America reached a 16-year high 7.5% last month.

"Unemployment hasn't really shown up yet, and when it does, it will grab everyone's attention," said Imre Speizer, currency strategist at Westpac Banking Corp. "Unemployment is the next big thing" and the predicted weakening of the labour market will probably push the New Zealand dollar lower, he said.

The kiwi fell to 50.76 US cents from 51.13 cents on Friday, and rose to 46.64 yen from 45.69 yen. It increased to 79.93 Australian cents from 79.38 cents on Friday, and was up to 39.82 euro cents from 39.70 cents.

Speizer said the New Zealand dollar may trade between 50.50 US cents and 51.40 cents today as it consolidates in this range. He expects it to "push the 50 cent barrier this week," but predicts it will find support around that level.

The kiwi will also come under pressure amid moves by export markets to adopt more protectionist trade policies after the European Union re-instituted export subsidies for its dairy farmers as global dairy prices tumbled.

Leaders at the World Economic Forum in Davos raised their concerns over a move to reinstall trade barriers, and World Trade Organisation Director-General Pascal Lamy said the WTO was monitoring government actions that would hinder free trade. Increased protections would reduce New Zealand exports, trimming demand for the currency.

The world's largest dairy exporter, Fonterra Cooperative Group, is holding an online auction for milk powder tomorrow, which could put more stress on the kiwi if milk powder prices continue to fall. Last week, Fonterra reduced its forecast payout for the 2008-2009 season to $5.10 per kilogram of milk solids, down from the $6 per kg predicted in November.

The average price of milk powder fell 9.3% in Fonterra's last online auction to US$2,017 per metric ton in January, more than 50% lower than when the auctions began in July last year. Dairy products accounted for 22% of New Zealand's $42.5 billion of exports in the 12 months ended October 31.

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