NZ Dollar Outlook: Kiwi may rise as data points to growth

NZ Dollar Outlook: Kiwi may rise as data points to growth

By Jason Krupp

July 4 (BusinessDesk) - The New Zealand dollar may rise against the greenback this week as the market shifts its focus to local data, with first-quarter growth and second-quarter business survey expected to show signs of further recovery in the domestic economy.

Six of the seven economists and market strategists surveyed by BusinessDesk saw the kiwi gaining momentum over the course of the week, and say it’s likely to test the post float high of 83.19 U.S. cents. One predicts the currency will hold near the current level of 81.80 cents.

The kiwi is likely to trade between a median range of 81.25 U.S. cents and 83.50 cents, according to the survey.

Markets will be focusing on fundamental drivers this week, where the New Zealand Institute of Economic Research's quarterly survey of business opinion for the June quarter and first-quarter gross domestic product at centre stage.

Tomorrow’s QSBO is expected to show rising levels of confidence and activity among New Zealand businesses, following the disruption and uncertainty in the first quarter caused by the February earthquake in Christchurch.

The inflationary expectations section of the report will be keenly watched to see if it puts the Reserve Bank under renewed pressure to raise the official cash rate.

The market was forced to push out its bet on when the central bank will start raising rates to January 2010 after two powerful aftershocks hit Christchurch last month. However a recent run of positive data suggests any strong inflation reads may force a rethink.

That will be followed by first-quarter GDP on Thursday, which is likely to show New Zealand's economy expanded by 0.4% according to a Reuters survey, driven by robust manufacturing and exports.

That would be the fastest pace since the 0.7% expansion in the same quarter last year and would exceed the 0.3% pace forecast in the Reserve Bank's June monetary policy statement, and sets the economy up for rebound in growth in the second half of this year, with the Reserve bank expecting GDP growth to accelerate to 1.2% in the fourth quarter.

"The GDP data, while historical, will be important because it confirms the New Zealand economy expanded in the first quarter despite disruptions caused by the earthquake," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "It confirms we had stronger growth momentum earlier this year than people give us credit for."

Commodities could present a stumbling block for the kiwi this week, after prices of local produce slipped for the first time since August last year.

The ANZ Commodity Price Index slipped 1.2% to 308.5 last month from a record high in the measure’s first decline for 10 months. Kiwifruit prices dropped 9% as the Northern hemisphere’s fruit season kicks into life, while beef prices dropped 8% amid an oversupply of imports into the U.S.

Still, the index remains at an elevated levels, as noted by economist Steve Edwards in his report.

The Australian cross rate will come in sharp focus this week, with the Reserve Bank of Australia review monetary policy tomorrow, followed by trade balance data for May on the same day, and the release of employment numbers for June later in the week.

The RBA is broadly expected to keep rates unchanged at 4.75% as Australian authorities wrestle with the dichotomy between the rampant mining sector and the rest of the lucklustre economy.

Strategists surveyed were evenly split on how the kiwi would fare against the Australian currency, with three economists and strategists expecting the kiwi to gain, three expecting it to fall, and one seeing it as stable.

"We're not expecting the data to be particularly strong in the first part of the week, but the employment report should improve things, so on the cross we're favouring the Aussie to outperform the Kiwi," said John Horner, an FX strategist at Deutsche Bank in Sydney.

That contrasted with the other majority view, where New Zealand's economic growth prospects are viewed more positively than Australia's.

"If you look at the momentum of the two economies and strip out mining and dairy, New Zealand is looking like it's coming into better patch while the Australian economy looks tired," said Philip Borkin, an economist at Goldman Sachs & Partners in New Zealand.

The market will also be paying close attention to U.S. economic data this week to assess whether a recent soft patch is a temporary anomaly or a sign that the recovery in the world's biggest economy has slumped.

Last week's ISM Manufacturing Index for June came in stronger-than-expected, with headline activity levels reading 55.3 for the month versus a market forecast of 52. That positive figure was tempered by a sharp increase in inventories, which pointed to a restocking following the Japanese Tsunami in March rather than an increase in demand.

This week's employment reports will remain the focus, with jobless claims for June expected to be released on Thursday, followed by the key non-farm payrolls report on Friday.

The European Central Bank is expected to raise rates 25 basis points to 1.5% when it meets on Thursday after the region pulled debt-stricken Greece from the brink of default. That is likely to see the euro track upwards, dragging growth-linked currencies such as the kiwi with it.

Meanwhile the Bank of England is largely seen as maintaining rates on hold at 0.5% amid a faltering economic recovery.

(BusinessDesk)

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