NZ Dollar Outlook: Kiwi may fall on inflation data

Photo / Martin Sykes

The New Zealand dollar may fall this week, retreating from a three-year high, after inflation figures raised concern the kiwi's rally may run out of steam, prompting traders to start selling their long positions.

Five of the six strategists and economists surveyed predict the kiwi dollar will trade lower this week against the US dollar, although the correction will be muted by the ongoing strength of commodity prices.

One strategist saw the currency as continuing to gain.

The kiwi dollar recently traded at 79.41 US cents, having dropped from 79.58 cents immediately before the Consumer Price Index was released and from as much as a three-year high of 80.03 cents earlier today.

Inflation was 0.8 per cent in the three months ended March 31, for an annual rate of 4.5 per cent.

A Reuters poll called for a 1 per cent quarterly rate for an annual 4.6 per cent.

"Every business survey and CPI reading gives information on what pricing power firms have, and the answer right now is not a tremendous amount," said Chris Tennent-Brown, an economist at Commonwealth Bank of Australia.

He said today's numbers remove any pressure on the Reserve Bank to remove monetary policy stimulus any time this year.

The bank cut the official cash rate to 2.5 per cent from 3 per cent in a bid to prop up the economy in the wake of the Christchurch earthquake.

A potential shift in market positioning is also seen as a significant headwind for growth currencies this week, with traders seen to be likely to collapse their long positions in the New Zealand dollar in favour of shorts amid signs that the currency has run out of upward momentum.

A long position is a bet a security will increase in price, while a short is a bet it will fall.

"There is a case for a small pullback in the kiwi, partly reflecting that we've come so far so fast," said Mike Jones, a currency strategist at Bank of New Zealand.

"In terms of positioning, the leverage and speculative accounts are heavily long on the Australian and kiwi dollar, and if we see this break up we can expect the kiwi and Aussie to go lower."

The kiwi dollar has gained 12.5 per cent since the lows of March 17, driven by rising risk appetite in the wake of surging commodity prices, and reinsurance flows related to the Christchurch earthquake, ongoing themes which should limit the scope of any correction, Jones said.

However, the currency is seen as approaching near the end of its run, having touched a post-float high of around 82 cents in March 2008.

"It's always difficult when we've had a massive move like this, and we're starting to approach psychological resistance levels," said Derek Rankin, a director at Rankin Treasury advisory Ltd.

Locally, the market will be looking to the Fonterra Cooperative Group's globalDairyTrade auction on Wednesday morning local time for a read on appetite for New Zealand commodities. The average price of milk powder fell 2.4 per cent to US$4,280 at the last auction, marking a second consecutive decline.

The Reserve Bank Australia is set to release the minutes from its April meeting tomorrow, with traders looking for any hawkish rhetoric as a lead on when interest rates are likely to rise.

The market is betting the central bank will raise rates by 24 basis points over the next 12-months, down from 26 basis points on Friday, according to the Overnight Index Swap curve.

With the week looking light in terms of domestic and offshore economic data, currency traders will be looking to China and Europe for leads.
Over the weekend China's central bank raised reserve requirements by 50 basis points for all depository financial institutions.

The hike, which marks the fourth rise this year, comes as the world's second largest economy has hauled out every tool at its disposal to cap its rampant inflation. China is New Zealand's second biggest trading partner.

Europe's sovereign debt crisis is also likely to remain in the spotlight this week, amid ongoing chatter about the likelihood of a Greek debt restructuring and a Moody's Investor Service downgrade of Ireland debt to Baa3, a cut of two notches.