Weak growth and dairy prices weigh on kiwi

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The New Zealand dollar may fall this week on concern about the impact on the local economy of slower Chinese growth, weak dairy prices and low inflation.

The kiwi may trade between 63 US cents and 66.50 cents this week, according to a BusinessDesk survey of eight currency analysts. Five expect the local currency to decline while three pick it will end the week higher. It recently traded at 64.36 US cents.

Investor concern so far this year has been focused on the likelihood that weaker growth from China, Asia's largest economy, will weigh on the rest of the world.

China accounts for about a third of global growth and data due out tomorrow is expected to confirm the country slowed last year.

The GlobalDairyTrade auction tomorrow night will likely confirm prices for New Zealand's largest commodity export remain weak while inflation data due Wednesday will miss the Reserve Bank's target.

"Over the week ahead, we expect the downward pressure on the New Zealand dollar to continue," ASB economist Kim Mundy said in a note. "We expect poor market sentiment to persist over the week ahead."

The New Zealand Institute of Economic Research tomorrow publishes its quarterly survey of business opinion, which is expected to show business confidence improved towards the end of last year, although the survey doesn't directly cover the agricultural sector, which may have been in a less buoyant mood due to weaker commodity prices and the risk of drought.

Analysts will be eyeing business expectations of costs and prices as they assess the outlook for inflation.

Over the week ahead, we expect the downward pressure on the New Zealand dollar to continue.

Fourth-quarter inflation data due out Wednesday is expected to show consumer prices continue to undershoot the Reserve Bank's 1 percent-to-3 percent target band. Annual inflation was just 0.4 percent in 2015, based on the both the Reserve Bank and economist forecasts. A weaker track for inflation increases the prospects of a further cut to the official cash rate, now back at its record-low level of 2.5 percent.

On Tuesday afternoon, the Real Estate Institute expects to publish its latest house price data for December, which will be closely watched for signs of cooling in the Auckland market.

We expect poor market sentiment to persist over the week.

Meanwhile, dairy product prices are likely to show a slight drop at the overnight GDT auction on Tuesday, as indicated by weaker whole milk powder and skim milk powder prices on the NZX futures market, according to OMF dealer Michael Peters.

On Thursday, the latest data includes the BNZ-BusinessNZ performance of manufacturing index for December, and the ANZ-Roy Morgan consumer confidence index for January.

Elsewhere this week, Chinese data on fourth quarter growth and December retail sales and industrial production will be closely watched tomorrow afternoon.

In North America on Wednesday, the US releases December inflation data while Canada reviews interest rates.

In Europe, the region's central bank reviews policy on Thursday.