NZ dollar outlook: falling kiwi likely on further dairy industry weakness

The New Zealand dollar is expected to decline this week, weighed down by further weakness in the country's key dairy industry and by a strengthening US dollar.

A BusinessDesk survey of 10 currency analysts puts a possible trading range for the kiwi at between 64.50USc 67.50USc this week. Six expect a decline while four say it may remain largely unchanged. None are betting on a rise. The local currency recently traded at 65.85USc.

The price for New Zealand's key export commodity, whole milk powder, may decline as much as 10% at this week's fortnightly GlobalDairyTrade auction, according to prices for futures contracts on the NZX. Further price weakness as New Zealand lifts its seasonal milk production is likely to prompt Fonterra Cooperative Group, the country's dominant milk processor, to lower its forecast payout to farmers following its monthly board meeting on Friday, analysts say.

"It's going to add renewed pressure on the kiwi to the downside and further calls for the Reserve Bank to perhaps be a little bit more forceful in its view" about the impact on the economy of lower commodity prices, said Stuart Ive, OMF senior dealer, foreign exchange.

OMF expects Auckland-based Fonterra to cut its forecast payout for the 2015/16 season to $4.05 per kilogram of milk solids from $5.25/kgMS following Friday's board meeting.

"It again means the realisation that we are not going to see those billions flowing into the economy from the milk powder," Mr Ive said. "Given the expectations around the data that we are going to see this week, we would say the pressures will remain to the downside almost certainly."

Other releases in New Zealand this week include the latest July property data from Quotable Value, due tomorrow, as well as July house sales data from Auckland's largest real estate agency, Barfoot & Thompson, due Wednesday. Motor vehicle registration data for July from the Motor Industry Association is scheduled for publication early this week.

Meanwhile, the ANZ Commodity Price Index is due out tomorrow, ahead of the GlobalDairyTrade auction early Wednesday morning.

Statistics NZ will publish the country's employment data for the second quarter on Wednesday. The unemployment rate is expected to edge up to 5.9% from 5.8% as employment growth slows to 0.5% from 0.7% amid slowing labour demand, according to a Reuters poll of economists. Low inflation is expected to keep a lid on wage growth.

In the US, all eyes will be on the key non-farm payrolls data scheduled for release on Friday, which is expected to show US companies added a similar number of jobs in July to the 223,000 added in June.

At the end of last week's Federal Reserve meeting, the Federal Open Market Committee kept alive expectations it will increase its benchmark Fed funds rate in 2015 and a solid non-farm payrolls number will keep the hiking bias in place, said OMF's Mr Ive.

The US also has reports on manufacturing, spending, trade and consumer credit due this week.

In Australia, the focus will be on the Reserve Bank of Australia's review of interest rates tomorrow, where no change is expected. Its Statement on Monetary Policy, which includes its updated economic forecasts, will be published on Friday. Australia also has data on June retail sales, trade and employment this week.

In China, the largest trading partner for New Zealand and Australia, the latest measures of manufacturing and services activity will be closely watched for signs of weakness.

In the UK, the main focus will be the Bank of England's policy meeting on Thursday, where no change is expected, and its inflation report.

The Bank of Japan reviews interest rates on Friday, with no change expected.

(BusinessDesk)