NZ Dollar Outlook: Kiwi in range amid Middle East turmoil

NZ Dollar Outlook: Kiwi seen caught in range amid Middle East turmoil

By Paul McBeth

Jan. 31 (BusinessDesk) – The New Zealand dollar will probably tread water this week as Egypt’s internal strife keeps investors wary of risk-sensitive assets, even as commodity-linked investments are bolstered by rising food prices.

All five economists and strategists surveyed by BusinessDesk expect the kiwi will hold its territory this week as strong prices for raw materials offset increasing aversion to higher-yielding, or riskier, assets. The kiwi currency slipped to 76.93 U.S. cents from 77.23 cents on Friday in New York.

World food prices rose 4.4% to a record in December, based on an index of 55 food commodities tracked by the UN’s Food and Agriculture Organisation, underpinning support for the kiwi dollar, with New Zealand mainly producing soft commodities, such as dairy. At the same time, high food prices and stubbornly high unemployment rates have unsettled Middle Eastern nations Tunisia and Egypt, the former having toppled its regime and the latter facing major unrest. The big fear facing markets is if there’s more contagion in the Arab world.

“Risk aversion is flaring up, and risk-sensitive currencies will be under pressure early in the week, with the Egyptian political situation watched to see whether it deteriorates,” said Mike Jones, strategist at Bank of New Zealand. “I still think there’s a case to buy on dips, because the fundamentals are very supportive on New Zealand commodity prices.”

The kiwi dollar has been supported in recent weeks by rising food prices, and Fonterra Cooperative Group’s online auction this week is expected to show more upside in returns on locally produced dairy. The average price across all products sold on the globalDairyTrade platform extended gains earlier this month to US$3,960 a tonne.

John Horner, currency strategist at Deutsche Bank in Sydney, said the kiwi dollar had held up in the face of dwindling appetite for higher yields on the back of its exposure to commodities, and this will play out through the year.

“We're upbeat on prices in the year ahead,” Horner said. “New Zealand is seen as one of the purer plays on soft commodities.”

Still, Horner is more pessimistic about local labour data due this week, which may put the currency under pressure.

New Zealand’s unemployment rate probably held at 6.4%, in the three months ended Dec. 31, according to a Reuters survey. The Household Labour Force Survey comes out on Thursday after tomorrow’s Labour Cost Index and Quarterly Employment Survey, but isn’t expected to dent the kiwi’s fare too much.

Khoon Goh, head of market economics and strategy at ANZ New Zealand, said the labour market data is typically a lagging indicator, and after the unexpected third-quarter contraction, may show an increase in joblessness.

“The overall picture is of a labour market that’s still improving if you look through the quarter-to-quarter volatility. That improvement will be rather gradual, which is no surprise, given the recovery,” he said.

U.S. non-farm payrolls on Friday will be the major data point for the world’s largest economy this week, with ISM manufacturing data also a big focal point. America’s gross domestic product reported an annualised rate of 3.2% in the December quarter, below expectations, but showing signs of optimism among consumers.

The Reserve Bank of Australia will review its target cash rate tomorrow and is expected to hold the benchmark at 4.75%. Investors will be looking for comments around the bank’s forecasts given the fiscal drag of the Queensland floods. The kiwi edged up to 77.74 Australian cents from 77.68 cents on Friday in New York.

All five strategists were neutral for the kiwi on a trade-weighted basis. The kiwi was little changed at 68.89 on the trade-weighted index of major trading partners’ currencies from 68.90 on Friday in New York, and fell to 63.17 yen from 63.84 yen. The kiwi rose to 56.59 euro cents from 56.31 cents last week, and was little changed at 48.5 pence from 48.56 pence.

On the data radar this week will be the government appointed Saving Working Group’s final report on how to lift New Zealand’s national savings rate tomorrow. Chinese and European manufacturing indices will be on traders’ agendas, as will Federal Reserve chairman Ben Bernanke’s speech to the National Press Club on Thursday in the U.S. The European Central Bank will review monetary policy on Thursday.

(BusinessDesk)

© Scoop Media