NZ Dollar Outlook: Kiwi may gain on global food inflation

NZ Dollar Outlook: Kiwi may gain as food inflation stokes demand

By Paul McBeth

Feb. 21 (BusinessDesk) – The New Zealand dollar may bounce from the bottom of its recent range this week as persistent food inflation underpins demand for commodity-sensitive currencies.

Four of eight economists and strategists in a BusinessDesk survey have a positive bias for the kiwi this week as investors continue to look for exposure to food producing nations. That’s helped offset rising risk aversion amid the political unrest in North Africa and the Middle East, and the prospect New Zealand experienced a second recession through the second half of last year. Three are neutral on currency, and one expects the kiwi will fall this week.

The kiwi rose to 76.36 U.S. cents from 76.06 cents on Friday in New York, shrugging off tighter monetary policy conditions in China as that nation’s central bank lifted the reserve requirements for lenders to a new record high.

Over the past six globalDairyTrade online auctions of milk powder, average prices have jumped 26% to the highest level since trading began in July 2008. That’s prompted Fonterra Cooperative Group to hold off on hiking prices locally, though the dairy exporter’s board meets this week and is expected to lift its forecast pay-out to farmers.

“The main interest this week will be the announcement from Fonterra around their pay-out – most people are expecting a 50c increase” to $7.40 per kilogram of milk solids, said Darren Gibbs, chief economist at Deutsche Bank New Zealand. “If we get that currency should move but not too much.”

Gibbs expects the kiwi will trade between 75 U.S. cents and 78 cents this week, though he predicts it will in the longer-term.

Khoon Goh, head of market economics and strategist at ANZ New Zealand, said an increase in the forecast pay-out to farmers will add a “boost to rural incomes and would be taken as a positive by currency markets.”

He expects the kiwi faces a positive bias this week, and will move towards the top of its recent range between 75 U.S. cents and 78 cents.

Mike Jones, strategist at Bank of New Zealand, was the only dissenting voice this week, picking the kiwi to come under negative pressure. Narrowing interest rate differentials with the U.S. have left the kiwi slightly over-valued, and he expects the currency will “test 75 U.S. cents at some stage during the week.”

The Reserve Bank of New Zealand will release its survey of inflation expectations, though that isn’t likely to show much price pressure in the economy and will probably be ignored by the market. Traders are betting Governor Alan Bollard will hike the official cash rate 49 basis points over the coming 12 months, according to the Overnight Index Swap curve, with recent data allowing looser monetary policy for longer.

Reserve Bank of Australia Governor Glenn Stevens will a speech on Wednesday on Australia and its resources boom, though investors won’t be expecting too much with the central bank forecast to stay on hold after storms and flooding caused widespread damage through Queensland and Victoria. Traders are betting the RBA will lift the target cash rate 33 basis points over the coming year, according to the Overnight Index Swap curve. The kiwi was little changed at 75.25 Australian cents from 75.14 cents on Friday in New York.

The Bank of England releases the minutes from its last board meeting on Wednesday in the U.K., and investors will be looking to see whether the nation’s growing inflationary pressures are feeding into thinking on monetary policy.

Imre Speizer, market strategist at Westpac Banking Corp., said the pound has broken through a technical barrier and will probably strengthen against the kiwi dollar. The kiwi slipped to 46.97 pence from 47.06 pence on Friday in New York, and declined to 55.70 euro cents from 55.92 cents.

“There are rumours more people are voting for hikes – if that’s the cash, there will be even more (pound) sterling strength,” he said.

Six of eight strategists surveyed expect the kiwi will respect its recent ranges on a trade-weighted basis, as New Zealand’s weak economic data offsets gains from rising food prices. One expects it to gain and the last predicts it will decline. The kiwi was little changed at 67.76 on the trade-weighted index of major trading partners’ currencies from 67.71 last week, and recently traded at 63.43 yen from 63.31 yen.

On the data radar this week is local credit card billing for January out later today. U.S. employment and housing data will be watched by investors, though Wall Street will be closed on Monday due to a President’s Holiday.

(BusinessDesk)

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