Upward pressure on the kiwi unlikely to let up

Expect more upward pressure on the New Zealand dollar this week, which is likely to put even more pressure on the Reserve Bank to cut its official cash rate (OCR) again.

And the week may also bring a little more relief for beleaguered dairy farmers.

The kiwi hit its highest levels against both the US and Australian dollars in more than a year last week, a combination of the Reserve Bank failing to cut its OCR last week and fading expectations that the US Federal Reserve will raise rates when it meets this week.

“A fortnight ago, market pricing suggested a 30% chance of a Fed rate hike at this meeting but, after the much weaker May payrolls report, the market now sees no chance of a move,” the head of wealth research at Craigs Investment Partners, Mark Lister, said.

Expectations of a US rate hike had been fuelling a rise in the greenback but the payrolls report stopped that in its tracks and the currency weakened, pushing the kiwi higher.

“The focus will, therefore, be on where the Fed sees the economy going and what the ‘dot plot’ suggests for the remainder of the year,” Mr Lister says.

“Back in March, the dot plot suggested Fed officials thought two hikes were appropriate in 2016. The market will pay close attention to whether this is still the case or if the Fed now sees just one hike as more likely.”

The New Zealand dollar gained 1.5% against the US dollar last week and is now 3.4% higher than it began the year. The kiwi has also gained 2.2% higher against the Australian dollar since the end of last year.

Growth and dairy figures
Also coming up this week is the March quarter GDP data. The market is expecting quarterly growth of about 0.6%, in line with the Reserve Bank’s forecasts, and annual growth of 2.7%.

Mr Lister says that’s a slowdown from the 0.9% growth in the September and December quarters last year.

“Unsurprisingly, the key reason for the slowdown is likely to be related to the agricultural sector,” he says.

“With dairying expected to be weak, we should see solidity in the sector relating to tourism, migration, construction and services.”

But the latest global dairy trade auction should bring some mildly positive news for the dairy sector.

“Given positive trends in other commodities of late, as well as a weaker US dollar, we would hope to see a modest rise in dairy prices,” Mr Lister says.

Since the lows earlier this year, the headline index is up 10.9% and the key whole milk price is up 16.4%, although they’re up just 2% and 1% respectively from this time last year.

Oil prices rose slightly last week with Brent crude oil closing at $US50.54.

Other local data due this week includes the March quarter current account figures due on Wednesday while on Friday the BNZ Performance of Manufacturing Index and the ANZ consumer confidence figures are due.

Little is scheduled on the corporate front other than Property for Industry’s annual shareholders’ meeting.

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