NZ dollar little changed after Fonterra raises forecast, Federal Reserve meeting looms

Wednesday 31st July 2013

The New Zealand dollar is little changed after Fonterra Cooperative Group hiked its 2014 forecast payout and ahead of a statement today which may provide further clues on when the US Federal Reserve is likely to pare back monetary policy stimulus.

The kiwi was little changed at 79.85 US cents, from 79.92 cents at the 5pm market close in Wellington yesterday. The trade-weighted index was little changed at 75.50 from 75.55 yesterday.

Fonterra, the world's biggest dairy exporter, lifted its forecast milk payout to farmers by 50 cents in the 2014 season as global supply remains constrained and as a weaker local currency bolsters export returns. Dairy is New Zealand's biggest export, accounting for more than a quarter of the annual $45.72 billion of goods sold overseas.

Traders are awaiting the outcome of a two-day meeting of the Federal Reserve Open Market Committee today, which they hope will provide guidance on when the Fed is likely to start tapering its US$85 billion a month asset purchase programme, which has debased the greenback. The Fed could start pulling back its stimulus in September, making this the last meeting for providing a timeline.

"All eyes are on the US FOMC meeting, that's the big focus," said Michael Johnston, a senior trader at HiFX. "The market is keen on trying to get further clarification on when the Fed is going to start taper its huge US$85 billion a month bond purchases, that's the real big focus.

"If there is less stimulus, interest rates will go up which will make the US dollar relatively more attractive and also less supply of US dollars getting pumped out into the system, so that will enable the US dollar to strengthen which will be negative for kiwi/US," Johnston said.

Fed chairman Ben Bernanke has said the Fed may pull back quantitative easing later this year and end the programme in mid-2014 as long as the economy continues to improve in line with the Fed's forecasts. Half of the 54 economists surveyed by Bloomberg expect the Fed to trim its bond buying programme to US$65 billion in September, when Fed chairman Ben Bernanke gets to explain policy changes at a post-meeting press conference.

There are no forecast updates or a press conference at this month's meeting, which means traders will focus on any changes in the statement wording. The statement will be released about 6am tomorrow New Zealand time.

Ahead of the Fed decision, traders will be eyeing US economic reports including second quarter growth. Annual growth slowed to 1 percent in the quarter, from 1.8 percent in the first quarter, according to Reuters polls.

In New Zealand today, traders will be looking to the ANZ Business Outlook survey for signs of continued strength after business confidence rose to a three-year high last month.

Later today, the Reserve Bank releases data on lending to households secured by residential mortgages.

The local currency touched 88.22 Australian cents last night, the highest in almost five years, after the Australian Reserve Bank governor Glenn Stevens signalled an interest rate cut was likely at next week's central bank meeting. The kiwi recently traded at 88.15 Australian cents, from 87.96 at the 5pm market close in Wellington yesterday.

"Any pullback in the kiwi/Aussie is an opportunity to jump on," said HiFX's Johnston.

Traders see a 92 percent chance the Reserve Bank of Australia will cut its 2.75 percent benchmark rate on Aug. 6. In comparison, traders see zero chance that New Zealand's central bank will raise the official cash rate from 2.5 percent at its next review on Sept. 12. However, they are pricing in 68 basis points of increases in the next 12 months, based on the Overnight Index Swap Curve.

"If they do cut by 25 basis points, the Reserve Bank of New Zealand's rate and the RBA rates will both be at 2.5 percent, but the bias for the New Zealand rates is at the topside and the bias for the Australian rates still remains on the downside," said HiFX's Johnston. "While that remains in force there is going to be upwards pressure on the kiwi/Aussie."

The New Zealand dollar slipped to 78.30 yen, from 78.58 yen yesterday and edged down to 60.22 euro cents from 60.28 cents. The local currency advanced to 52.37 British pence from 52.13 pence yesterday.

BusinessDesk.co.nz

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