NZ dollar outlook: kiwi may advance as 6.5% slide in May seen as overdone

The New Zealand dollar may advance against the greenback this week as investors bet a slide in the local currency last month was overdone.

The kiwi recently traded at 80.74 US cents from 80.68 cents at 5pm yesterday. It may trade in a range of 79.36 US cents to 83 US cents this week, with a positive bias, according to a BusinessDesk survey of eight strategists and traders.

It slumped 6.5 percent in May on the expectation improving economic data out of the US may prompt that nation's central bank to end a stimulus programme that has been keeping the greenback low. But the American currency is faltering after some softer-than-expected reports.

"We have had such a significant rally in the US dollar in the last few weeks," says Dan Bell, a currency strategist at HiFX. "We are seeing a relief rally in the New Zealand dollar."

The US Dollar Index, which measures a basket of currencies against the greenback, dropped after a report showed American manufacturing unexpectedly contracted in May, indicating the industry will provide little support for the world's largest economy.

That damped suggestions the Fed will reduce its quantitative easing stimulus any time soon.

The report showed manufacturing declined to nearly a four-year low of 49 in May, compared with an expected expansion of 51.

Federal Reserve Bank of Atlanta president Dennis Lockhart said the report was an example of the "very mixed" readings that indicate the economy is not strong enough to justify a reduction in the central bank's bond-buying programme.

The Fed is buying $US85 billion a month in bonds to bolster growth and cut unemployment, which tends to debase the greenback.

Tonight, Richard Fisher, president of the Federal Reserve Bank of Dallas, and Esther George, president of the Kansas City Fed, are scheduled to speak. Considered neutral or hawkish, they are unlikely to move the market, BNZ strategist Kymberly Martin says in a report.

A report on US employment for May due Friday will provide investors with more information on the health of the US economy and the likely timing of any reduction in the Fed's stimulus measures.

"Friday's payrolls are definitely the wildcard," Ms Martin says. "A much softer-than-expected outcome would see the 'tapering of QE' debate lose momentum and the New Zealand dollar benefit as US bond yields pull back along with broad US dollar weakness."

Prices are likely to drop moderately at the global dairy trade auction tomorrow morning. Still, Fonterra's forecast dairy payout will only be called into question if prices drop dramatically, she says.

Traders will be awaiting a report on the value of building work for the first quarter, scheduled for release at 10:45am tomorrow. The ANZ commodity price index for May is also due at 1pm tomorrow.

In Australia, the nation's central bank is expected later this afternoon to leave its benchmark interest rate at a record low 2.75 percent following a 25 basis point cut in May, according to a Reuters survey of 23 economists.

Investors will be looking for signals of the central bank's future intentions as a slowdown in Australia's key mining industry increases expectations of future rate cuts.

The kiwi, which recently traded at 82.84 Australian cents, may reach 87 cents by the end of this year on better prospects for growth and higher interest rates in New Zealand, Ms Martin says.

Traders will also be watching a report on Australia's first quarter GDP tomorrow. Annual growth is expected to have slowed to 2.7 percent from 3.1 percent, according to a Reuters survey of 18 economists.

On Thursday, the Bank of England is expected to keep its benchmark interest rate at 0.5 percent, according to a Reuters survey of 68 economists. The European Central Bank is also expected to hold its key rate at 0.5 percent that day, a Reuters survey of 81 shows.

(BusinessDesk)