New Zealand Dollar Outlook Negative But Can Dairy Prices Boost NZD?
The Dairy Auction and Employment Report will provide near-term direction for the maligned New Zealand dollar.
We will be watching whether the New Zealand dollar (NZD) is able to yield further ground to rivals in the first week of August.
The NZ dollar has actually managed to arrest its decline from mid-July after traders got a hint that the Reserve Bank of New Zealand (RBNZ) may look to quit its interest rate cutting regime for the time being.
The NZD was actually an outperformer towards the close of July as recent declines were deemed to have been excessive.
A much-watched speech made by the RBNZ disappointed those looking to chase the NZ dollar even lower as it ruled out aggressive rate cuts as the economy is not in recession.
Nevertheless, strength was ultimately short-lived and after reaching a high of 0.674 against the US dollar sellers regained control.
The move has also seen a base carved on GBP/NZD’s pullback and 2.3200 appears to be a major line of support.
There are key risks ahead this week as markets will have a dairy auction and employment report to latch on to.
New Zealand exchange rates to Reference
The pound to New Zealand dollar exchange rate (GBP/NZD) is seen at 2.3637 at the time of writing.
The euro to New Zealand dollar exchange rate (EUR/NZD) is at 1.6629.
The New Zealand to US dollar exchange rate (NZD/USD) is at 0.6599.
The Australian to New Zealand dollar exchange rate (AUD/NZD) is 1.1192.
Key Events for the New Zealand dollar
Dairy Auction, 4-5 August:
“The RBNZ easing cycle was triggered by the slide in dairy prices, with the subsequently much lower NZD at least providing some offset. With enhanced supply and unreliable demand from China we doubt we’ve seen the floor yet,” say TD Securities in their Asia-Pac Week Ahead briefing.
Dairy exports are the largest export sector in New Zealand - the price of milk therefore matters for the currency and signs that a floor in dairy prices will be required for a positive feed through to the currency to be realised.
Already we are hearing it will largely be a case of more of the same with futures pointing to a fall of up to 10%. This may already be factored into the value of the NZ dollar but it confirms the underlying fundamentals are simply not supportive to the outlook.
Aug 5 Employment report:
“ANZ biz report suggests an easing of labour demand, while supply is enhanced via strong migration, so we pencil in a more modest +0.5% lift in employment in the quarter, with a tick higher in the participation rate leaving the unemployment rate at 5.8%” say TD Securities.
If the figure misses the mark then we could see the NZD fall as this would represent an additional headache for the RBNZ to remedy.
Markets are presently pricing in an additional interest rate cut in 2015 while some leading institutional researchers are factoring in two more cuts.
If the ‘two cuts’ camp are correct then the NZ exchange rate complex will have to fall further as markets swiftly reprice the currency.
Either way, this week’s labour data could well lay out the terms of the interest rate debate and is therefore central to near-term direction.
Longer-term, the markets are aligned against the NZ dollar with trend momentum advocating for further declines and continued weakness in Chinese growth being an anchor to the broader commodity dollar family.
