The New Zealand dollar may decline this week as weaker dairy prices are expected to see Fonterra Cooperative Group pull back its forecast payout to farmers.
The local currency may trade between 84.30 US cents and 86.50 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Seven predict the kiwi will fall this week, while three expect it to increase. It recently traded at 85.32 US cents.
Reserve Bank governor Graeme Wheeler told a dairy farmers' conference in Hamilton this month that the local currency was overvalued and the central bank may intervene in the market to sell New Zealand dollars, should the kiwi remain high while commodity prices fall. Dairy prices at Fonterra’s GlobalDairyTrade auction declined for the seventh time in a row last week, fuelling speculation the world’s biggest dairy exporter will reduce its forecast payout to farmers on Wednesday following its monthly board meeting.
ANZ Bank New Zealand, the nation's largest rural lender, expects Fonterra may pull back its current forecast for a record payment of $8.65 per kilogram of milk solids by 20 to 30 cents and set its opening level for the coming season below $7 in response to the lower prices.
"The main theme this week will be the milk price payout which is a proxy for our global dairy industry," said Sam Tuck, senior foreign exchange strategist at ANZ in Auckland. "For the New Zealand dollar, it's not as good as we might have previously supposed so that might take a bit of the cream off the New Zealand dollar as well as the milk price."
The kiwi may test its support level of 85 US cents this week, which would mark its lowest level since the Reserve Bank started hiking interest rates in March, Tuck said. "Offshore markets are looking for reasons to sell New Zealand dollars," he said.
Still, the kiwi will probably continue to remain attractive to investors beyond this week because of its higher yield on the expectation the central bank will hike rates for a third time at its next review on June 12, and potentially leave the door open for another rise in July.
"We are not expecting it to fall out of bed," Tuck said.
The week will probably start on a quieter note as US financial markets are closed for the Memorial Day holiday today while the UK has a bank holiday.
This afternoon, the central bank will release its April data on low equity bank mortgage lending.
Tomorrow, the New Zealand Institute of Economic Research publishes its quarterly predictions. On Thursday, the Reserve Bank releases details of its foreign currency assets and liabilities for April, which would indicate if it has been active in the currency market, while Finance Minister Bill English will give a post-budget speech to the Hutt Valley Chamber of Commerce.
On Friday, April data on building consents and household credit are released while the ANZ publishes its latest business confidence survey.
Elsewhere this week, Japan will publish data on April inflation, the US has first quarter GDP, Australia has capital expenditure data, a key indicator of how the transition from mining investment to other forms of business investment is progressing, and China has manufacturing PMI.