Dollar Outlook: Kiwi may break 78c on strong commodities, CPI

Photo / Martin Sykes

The New Zealand dollar will probably test US78c this week as the currency rides the wave of stronger prices for raw materials.

Five of six strategists and economists in a BusinessDesk survey expect the kiwi will push to the top of its range this week, having a look at 78 US cents as strong commodity prices underpin the currency. One was neutral on the kiwi, picking the greenback to recover some of last week's losses.

The price for locally produced raw materials hit a record-high last month, according to the ANZ Commodity Price Index.

Global demand for raw materials, in particular so-called soft commodities such as agricultural products, has remained solid as supply has come under pressure in recent months, helping stoke support for the kiwi dollar.

Dairy exporter Fonterra reported a 3.8 per cent increase in the average price of whole milk powder in the year's first globalDairyTrade auction, and prices at this week's auction may advance further.

"I'm expecting a good auction result, with a decent jump in dairy prices," said Khoon Goh, head of economics and strategy at ANZ New Zealand. "That would fundamentally provide further support, if any were needed."

Goh expects the kiwi will be 'well-bid' this week, though 78 US cents will probably be too much of a stretch to break.

The kiwi fell to 76.58 cents today from 76.93 cents on Friday in New York.

Quarterly inflation data on Thursday will include the government's hike in consumption tax feeding into the data for the first time.

Economists expect the consumer price index rose 2.3 per cent in the final quarter of 2010, according to a Reuters survey. About 2 percentage points of that will likely come from the increased goods and services tax. Analysts said the jump in the CPI won't have much bearing on the Reserve Bank's official cash rate review next week, as the central bank will 'look through' the price spike.

Robin Clements, economist at UBS New Zealand, said the CPI figure will be relatively neutral for the kiwi, though he expects it to gain this week.

"On the face of it, higher inflation might prompt you to think the Reserve Bank will be hawkish, but most of the increase is GST related, so it won't be taking account of that," Clements said. "It would have to be particularly higher or a lot lower to move the kiwi."

November retail sales data on Friday will probably show a 1.2 per cent increase in total consumer spending in the lead-up to Christmas, according to Reuters data, which may spark a knee-jerk reaction to buy kiwi if inflation is starts to show mounting price pressures.

Mike Jones, a strategist at Bank of New Zealand, said the local data may encourage investors to by kiwi this week, as commodity prices remain firm, and the Queensland floods put Australia on the back-foot. He expects the kiwi will test 78 US cents later in the week.

Imre Speizer, market strategist at Westpac Bank, said the kiwi may face a pull-back against its Australian counterpart after a strong rally since late December. The kiwi rose to 77.57 Australian cents from 76.99 cents on Friday in New York.

European finance ministers are meeting in Brussels, and are rumoured to lift the region's emergency bail-out fund, with German easing its opposition to such a measure. The euro rose 3.7 per cent last week, the weekly gain since May 2009, and recently traded at 1.3351 per US dollar. The kiwi slipped to 57.41 euro cents from 57.51 cents on Friday in New York, and declined to 48.36 pence from 48.49 pence.

Four of six strategists surveyed expect the kiwi will gain on a trade-weighted basis this week, with the other two holding a neutral outlook. The currency was little changed at 69.03 on the trade-weighted index from 69 last week, and rose to 63.62 yen from 63.45 yen.

On the data radar is the Real Estate Institute's house sale price figures tomorrow and the Business New Zealand-BNZ performance of manufacturing index on Thursday. China's monthly dump of economic and inflation data on Thursday will be closely followed by the market, as will the Bank of Canada's meeting on Wednesday.