Dollar Outlook: Kiwi may rise to record high as local economy seen outperforming US

ANZ Bank New Zealand senior foreign exchange strategist Sam Tuck

The New Zealand dollar, which touched a three-year high last week, may break through that level this week to reach a record since the currency was allowed to trade freely in March 1985 as investors contrast weaker growth prospects in the US with the outlook for a strong local economy.

The kiwi may trade between 86.40 US cents and 89.90 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Seven predict the kiwi will rise this week, while two pick it to decline and one expects it to remain largely unchanged. It recently traded at 87.75 US cents.

The New Zealand dollar last week touched 87.94 US cents, its highest level since a post-float high of 88.40 cents in August 2011. Seven of 10 surveyed by BusinessDesk expect the kiwi to surpass that level this week to reach a new record as the strength of the New Zealand economy keeps the nation's interest rates higher, while weaker growth prospects in the US weigh on the greenback.

"The domestic situation has surprised the offshore markets," said ANZ Bank New Zealand senior foreign exchange strategist Sam Tuck. "The overt hawkishness of the RBNZ at the July meeting and the subsequent move of market pricing in terms of the rates market really hammered home the message overseas that the New Zealand economy is doing very well."

By contrast, data last week showing the US economy contracted at an annual 2.9 percent rate in the first quarter raised concerns about the pace of growth in the world's largest economy. Prior to the gross domestic product report, the Federal Reserve cut its projection for 2014 GDP to 2.1 percent to 2.3 percent, from a previous expectation of 2.8 percent to 3 percent.

"It sets a relatively high bar for the US to perform as to the Fed forecast for the rest of the year," said the ANZ's Tuck. "When you are contracting that much in the first quarter, your next three quarters have to be very very strong in order to reach targeted growth."

US data scheduled for release this week includes the Institute for Supply Management manufacturing index on Tuesday and non-manufacturing index on Thursday, and key non-farm payrolls data on Thursday. US markets are closed Friday for the Independence Day holiday.

US data will have to outperform expectations to arrest the US dollar decline, said ANZ's Tuck. In contrast, traders are cautious about selling the kiwi.

In New Zealand this week, traders will be eyeing Wednesday's Fonterra Cooperative Group GlobalDairyTrade auction and the ANZ June commodity price index.

Neither Australia's central bank, which meets on Tuesday, or Europe's central bank, which meets on Thursday, are expected to change interest rates.

(BusinessDesk)

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