NZ dollar heads for 2.4% weekly drop as Fed eyes rate hikes, questions loom over local economy
By Paul McBeth
May 29 (BusinessDesk) - The New Zealand dollar is heading for a 2.4 percent weekly drop against the greenback as comments by Federal Reserve officials revive expectations the world's biggest central bank will hike interest rates this year, while investors grow wary about the local outlook.
The kiwi sank to 71.32 US cents at 5pm in Wellington from 73.11 cents on Friday in New York last week. It traded at 71.74 cents at 8am and 72.42 cents yesterday. The trade-weighted index declined to 74.83 from 75.92 yesterday, and is heading for a 2 percent fall on the week.
A BusinessDesk survey of 13 currency advisers predicted the kiwi would trade between 70.60 US cents and 75 cents this week, with 11 expecting it to fall and two betting it would gain.
Fed chair Janet Yellen last week said she expected interest rates would start rising this year, prompting investors to focus more closely on US economic data so as to second-guess when the Fed will start lifting the federal funds rate from a range of between zero and 0.25 percent. That was reinforced by stronger economic data earlier this week, and the second estimate of first-quarter gross domestic product will be watched for more signs of life in the world's biggest economy.
"The kiwi really took a bit of a shellacking in the last week or so," said Michael Johnston, senior trader at HiFX in Auckland. "It's more to do with the US dollar waxing and waning."
At the same time, New Zealand's economy is coming under greater scrutiny after Fonterra Cooperative Group trimmed its forecast payout to its farmer shareholders for the current season, while predicting a payout of $5.25 per kilogram of milk solids. The world's biggest dairy exporter anticipates a slow return by Chinese buyers, while easy growing conditions have meant global supply remains high. A weak business confidence survey today added to the downward pressure on the local currency.
Johnston said he expects the kiwi will fall below 70 US cents in the coming months as the Fed gets closer to hiking interest rates, and markets revert to a greater semblance of normality.
Traders are pricing in a 54 percent chance the Reserve Bank will cut interest rates at next month's monetary policy review, with recent policy steps from both the central bank and government to rein in Auckland's property market seen as providing governor Graeme Wheeler headroom to provide looser policy.
New Zealand's two-year swap rate fell to 3.33 percent at 5pm in Wellington from 3.38 percent yesterday, and the 10-year swap rate dropped to 3.87 percent from 3.94 percent.
Johnston said negotiations between Greek policymakers and European Union and International Monetary Fund officials on nutting out a repayment deal will loom over the kiwi dollar next week, and if Greece ultimately defaults, a slump in the euro would drag the kiwi lower.
New Zealand's currency dropped to 65.17 euro cents at 5pm in Wellington from 66.31 cents yesterday, and fell to 46.55 British pence from 47.14 pence.
Australia's Reserve Bank reviews the target cash rate on Tuesday next week, and traders are pricing in a 5 percent chance of a rate cut. The kiwi fell to 93.17 Australian cents at 5pm in Wellington from 94.16 cents yesterday, and it dropped to 4.4242 Chinese yuan from 4.486 yuan.
The local currency declined to 88.32 yen from 89.80 yen yesterday.