Dollar Outlook: Kiwi may fall on weak retail sales

Photo / Martin Sykes

The New Zealand dollar may extend its decline against the greenback this week after weaker-than-expected retail sales set a pessimistic tone for the currency.

All eight economists and strategists in a BusinessDesk survey are downbeat on the kiwi dollar, with the growing level of support for the greenback compounded by today's soft consumer spending numbers.

The kiwi dollar dropped 30 basis points after data showed retail sales shrank 1.1 per cent in December, more than the 0.2 per cent contraction forecast, and recently traded at 75.68 US cents from 76 cents on Friday in New York.

"Retail sales took the kiwi a bit lower," said Derek Rankin, director at Ranking Advisory Ltd.

"The kiwi will probably drift lower this week" after the retail set a soft tone amid a positive outlook for US data, he said.

Rankin expects the kiwi will find support at 75 US cents, though it probably has "a bit more to go" after today's loss.

More positive data from the US is expected to underpin the kiwi's weakness this week as investors vacillate between supporting the euro and the greenback.

American retail sales and inflation data are expected to continue to paint an optimistic picture of the world's biggest economy.

"People are either die-hard buyers of the US dollar, or die-hard buyers of the euro," Rankin said.

John Horner, currency strategist at Deutsche Bank in Sydney, said New Zealand's data has been disappointing in recent months, and he expects the kiwi will extend its declines this week, trading in a range of between 74.50 US. cents and 77 cents.

"The run of data out of the US has been on the high side and that's generated greater confidence that the recovery there is more self-sustaining and less reliant on stimulus," he said.

Still, the ongoing strength in global food prices is helping offset any kiwi dollar weakness, and Imre Speizer, market strategist at Westpac Banking Corp., expects dairy prices will build on recent gains in Fonterra Cooperative Group's online auction this week.

Milk powder prices climbed 7.2 per cent to 18-month highs two weeks ago, on the globalDairyTrade platform.

He said the kiwi is under increasing pressure for a significant decline since its decline to within a range of 75.40 US cents and 75.80 cents, a range that contains a number of key trigger levels.

Chinese inflation data tomorrow will be watched after the People's Bank of China hiked its lending rate a quarter point to 6.01 per cent last week in a bid to rein in rising consumer prices.

All eight strategists surveyed have a negative bias on the kiwi on a trade-weighted basis with the US dollar hanging over its head. The TWI fell to 67.75 from 67.95 on Friday in New York.

It was little changed at 56.05 euro cents from 56.02 cents last week, and fell to 47.26 pence from 47.33 pence.

The kiwi fell to 63.10 yen from 63.40 yen on Friday in New York.

Japan's economy shrank an annualised 1.1 per cent in the three months ended Dec. 31, the first contraction in five quarters, according to government figures today.

That comes as the world's third-biggest economy continues to struggle with deflation, and has embarked on quantitative easing in a bid to kick-start growth.

The Reserve Bank of Australia releases the minutes from this month's board meeting tomorrow, which are expected to affirm the neutral stance the central bank has on interest rates for the upcoming year.

Traders are betting the RBA will hike its overnight target cash rate 34 basis points over the coming year, according to the Overnight Index Swap curve.

With 51 basis points of increases priced in for the Reserve Bank of New Zealand, Australia's yield advantage will lessen, though only just. The RBA's benchmark rate is currently at 4.75% compared to New Zealand's 3 per ent.

The kiwi fell to 75.49 Australian cents from 76.12 cents last week.

Chris Weston, markets strategist at IG Markets in Melbourne, said rates are still supportive of the Australian dollar, which will probably outperform the kiwi over the coming year.

"Both currencies will not trade too much on yield going forward so it's going to economic data driving risk," he said.

On the data radar this week is local consumer confidence and manufacturing data on Thursday. German business confidence and economic growth indicators will be watched as European government bonds come to maturity. UK inflation and retail data will also be worth watching.