NZ Dollar Outlook: Kiwi to fall as interest rates seen low for longer

Photo / NZ Herald

The New Zealand dollar may finish the week lower as investors push out expectations on the timing of Reserve Bank interest rate hikes because a high kiwi and modest economic recovery are keeping inflation well within the bank's target range.

The New Zealand dollar recently traded at 81.67 US cents, little changed from 81.74 at 8am this morning and from 81.87 cents at the close of trading in New York on Friday. That's at the lower end of this week's forecast range of 80.50 cents to 83.50 cents, according to a BusinessDesk survey of six analysts.

Three of the six analysts predict the kiwi will finish the week lower, two higher and one unchanged.

Traders have been reassessing the timeline for a rate hike by the Reserve Bank, and are pricing in just 10 basis points of increases over the coming 12 months, according to the Overnight Index Swap curve.

Governor Alan Bollard has kept the Official Cash rate at a record low 2.5 per cent for two of the past three years and is expected to keep the OCR on hold this Thursday, according to all 14 economists in a Reuters survey.

"We think that the Reserve Bank will adopt a dovish tone - there are many things pointing that way - lower gross domestic product, weaker consumer price index and a higher currency," said Imre Speizer, market strategist at Westpac Banking Corp. "This will effectively push out the hike date."

"There is a negative bias again for the kiwi this week - we are certainty seeing more negatives for the risk-on on the horizon," he said.

Investors will be eyeing central bank meetings in the US and Japan this week. Federal Reserve policymakers are scheduled to meet on Tuesday, with post-meeting comments by Chairman Ben Bernanke on Wednesday being closely watched for fresh clues on any new supportive measures.

The Bank of Japan meets on Friday, where it is expected to give the economy a helping hand with further easing.

"Our own Reserve Bank announcement could be easily overshadowed by anything the Fed might say," said Peter Cavanaugh, senior client adviser at Bancorp. "Bernanke will repeat the theme the US economy is in recovery but that the recovery is moderate."

Across the Tasman, Australia's consumer price index will be released on Tuesday, with the market pricing in a 0.6 per cent increase for the March quarter, according to a Reuters poll of 17 economists.

"If it comes in on expectations the Reserve Bank of Australia will likely cut rates, pushing the New Zealand dollar higher - maybe to 80 cents," said Tim Kelleher, head of institutional FX sales NZ at ASB institutional.

Minutes from the Reserve Bank of Australia's March meeting released earlier this month showed it's poised to cut the cash rate in the face of a slowing economy. Governor Glenn Stevens has kept the cash rate unchanged at 4.25 per cent since December.

The New Zealand dollar recently traded at 78.81 Australian cents and has gained from 76.03 cents at the start of the year.

In the US, world's largest economy, earnings season continues with software and electronics company Apple set to release its earnings this week. So far earnings season has been shaping up nicely with about 81 per cent of Standard & Poor's 500 companies that have reported surpassing expectations, according to Reuters.

Europe's performance manufacturing index is set for release today, along with China's HSBC flash manufacturing PMI.

There is no significant data set for release in New Zealand today. International travel and migration for March and the country's national employment indicator for February will be released by Statistics New Zealand International Travel and Migration on Tuesday.

It is a short week with markets closed in New Zealand and Australia on Wednesday for the Anzac Day holiday.