NZD/USD: Dimming Outlook for Australia to Weigh on the Kiwi

The New Zealand dollar is foreseen to weaken opposite the US dollar today as a deteriorating outlook for Australia, its largest trading partner, is likewise seen to dampen prospects for the domestic economy. After a string of bleak economic data was released yesterday, the markets widely expect the Reserve Bank of Australia to cut rates for the fourth time this year.

At the same time as economists believe that the resources boom is nearing its peak, the non-mining sectors of the economy are showing ominous signs of weakness. Retail sales were unchanged in October despite a rate cut during that month, providing a tepid lead into the vital Christmas holiday season. The flat reading proved pale compared the expected 0.4 percent increase in consumer spending. The ANZ Banking Group also reported that job advertisements are now 17 percent lower than in November last year. Meanwhile, a key gauge of manufacturing activity, published by the Australian Industry Group, dipped 1.6 points in November to a grade of 43.6. Likewise, official figures revealed that company profits dropped 2.9 percent in the third quarter, and were down 13.0 percent from a year earlier.

As such, economists are almost unanimous that the RBA will trim the Official Cash Rate to 3 percent today, matching the low it hit during the aftermath of the financial crisis, to help boost economic activity outside the mining sector as the resource boom begins to taper off. Owing to their close trading ties, a downbeat assessment for the Australian economy likewise translates into a bleaker outlook for the Kiwi economy. The Reserve Bank of New Zealand convenes for its own interest rate decision on Thursday, and benign inflation, higher unemployment, and a still lackluster economy are foreseen to keep borrowing costs on hold.

Also expected to weigh on the risk-sensitive New Zealand dollar today is bleak manufacturing data from the US. The Institute for Supply Management reported that its index of national factory activity dropped to 49.5 points in November from 51.7 in October, reaching its lowest level in more than three years. This was also the first time American manufacturing contracted in three months as factories scaled back hiring and investment amid uncertainty about the US economic and budget policies, particularly the fiscal cliff. Considering these factors, a short position is advised for the NZD/USD trades.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.