NZ dollar outlook: Kiwi may fall as central bank action awaited

BUSINESSDESK: The New Zealand dollar may fall this week amid continued concern that global growth remains stalled, leaving central banks such as the Federal Reserve and European Central Bank in a key position to provide more stimulus.

The kiwi recently traded at 79.99 US cents, little changed from 80.05 cents at 8am. That is right in the middle of this week's predicted trading range of 79 cents to 81 cents, according to a BusinessDesk survey of five analysts.

Three analysts predict it will finished the week lower and two higher.

Central banks will be the focus this week, with speculation support is coming from the US, Europe and China.

Last week Federal Reserve chairman Ben Bernanke underpinned that US policymakers are ready to act to accelerate the pace of economic expansion despite stopping short of announcing specific measures.

"Clearly the Fed stands ready if needed," says Tim Kelleher, head of institutional FX sales NZ ASB Institutional. "If they are needed is the multi-million dollar question."

Investors will be eyeing European Central Bank president Mario Draghi and the comments he will make after the bank's policy meeting on Thursday.

In July Mr Draghi promised to do "whatever it takes" to safeguard the euro, and investors are expecting he will announce further details on plans to buy debt of struggling euro nations, such as Spain and Italy – an idea that has had little support from Germany.

"Draghi has to deliver the goods now. The ECB has to come up with a working plan on some form of bond buying for these nations," says Stuart Ive, currency strategist at HiFX.

The European Union's performance manufacturing index, retail sales and second quarter gross domestic product will be released later in the week.

Manufacturing in China, New Zealand's second-largest export market, declined to 49.2 in August from 50.1 in July based on the Purchasing Managers Index, the lowest level in nine months as new orders contracted and output rose at a slower pace.

The data places increased pressure on Premier Wen Jiabao to reverse the nation's economic slowdown ahead of the transfer of power to a new Communist Party leadership which begins later this year.

"China is in a fairly difficult position," says Alex Sinton, senior dealer at ANZ New Zealand. "We still expect them to cut the reserve ratio requirement. Their action is needed – the world economy isn't looking that flash at the moment."

The final HSBC China PMI estimate is set for release this afternoon, and also the non-manufacturing PMI.

The Reserve Bank of Australia will hold its monthly policy meeting in Sydney tomorrow and the official cash rate expected to remain unchanged on 3.5%.

New Zealand's largest export market will also release its second-quarter gross domestic product figures, employment statistics and July trade data this week. The kiwi was largely unchanged on 77.75 Australian cents from 77.81 cents at 8am.

Traders widely expect the Bank of England and the Bank of Canada to keep rates unchanged at policy meetings this week.

In the US, the world's largest economy, the labour market's continued weakness may be enough to spur the Fed into announcing a third round of asset purchases, with Reuters and Bloomberg forecasting Friday's non-farm payrolls report will show 125,000 jobs were added in August, down from 163,000 in July.

"If we get a reasonable result from the US payrolls it may not be good for the fortunes of the Aussie and the kiwi," says Sam Coxhead, currency adviser at Direct FX.

The US Institute for Supply Management manufacturing survey will be released tomorrow, non-farm productivity and labour costs on Wednesday and the ADP private-sector employment report and weekly jobless claims on Thursday.

Markets in the US will be closed for the Labor Day holiday overnight.

New Zealand data out today included second-quarter terms of trade from Statistics New Zealand, which fell 2.6% to the lowest level since the first quarter of 2010, with the biggest contribution coming from a slide in dairy prices.

ANZ job advertisements will be release this afternoon. That is followed by ANZ commodity prices on Tuesday and Fonterra's GlobalDairyTrade auction on Wednesday morning. Prices of dairy products posted their third-biggest gain in about two years, up 7.8% at the last auction, paced by whole and skim milk powder.

The wholesale trade survey for June from Statistics NZ is due out on Friday.