NZ dollar heads for 4.2% decline in 2014, reflecting weaker dairy prices, stronger greenback

The New Zealand dollar is heading for a 4.2 percent decline this year, pulled down by a drop in dairy prices, the country's largest commodity export, and a stronger greenback as the US economy recovers. It may gain next year as the local economy outperforms its peers.

The kiwi traded at 78.44 US cents at 3:30pm in Wellington from 81.91 cents at the start of the year. The expanded trade-weighted index advanced to 79.40, having started the year at 77.86.

The kiwi soared close to its post-float record this year, touching a high of 88.35 US cents in July, before losing its lustre in the face of declining dairy prices and a pause in interest rate rises. Still, some analysts say it could strengthen in 2015, underpinned by a rebound in dairy prices and relatively weak economies elsewhere.

"The main reason for the milk price falling was that China got overstocked on inventory in milk powder and also that there was a wash effect from sanctions in Europe as all of a sudden products that were going into Russia were not able to anymore and therefore they were dumped on world markets and that has depressed milk prices as well," said Derek Rankin, a director at Rankin Treasury Advisory.

"Those sorts of effects are seen as relatively transitory and ultimately China will start buying milk powder again as their inventories run down and supplies in Europe will find other markets," he said. "If milk starts to strengthen again, then the New Zealand dollar will start to respond to that."

The New Zealand dollar strengthened today after the HSBC/Markit Purchasing Managers' Index for December, which measures factory activity, printed at 49.6, ahead of the preliminary 49.5 flash estimate but below November's 50 level that separates growth from contraction. China is New Zealand's largest trading partner.

Rankin said the US dollar was likely to be stronger in the coming year against the euro, yen and pound, reflecting the relative weakness of those economies. However he said US officials may start to talk down the strength of their currency and its negative economic impact on the country's exports, import prices and inflation, and interest rate hikes may be pushed out.

"The New Zealand dollar will probably recover over the year," said Rankin. "New Zealand's economy is actually performing pretty well. Globally a lot of economies are slowing down."

The kiwi will probably return back above 80 US cents but is unlikely to reach 85 cents, he said. The gain may prompt Reserve Bank governor Graeme Wheeler to continue his campaign against the "unjustified and unsustainable" kiwi in 2015.

The New Zealand dollar has gained 3.6 percent against its Australian counterpart this year, recently trading at 95.51 Australian cents, from 92.17 cents at the start of 2014. The kiwi touched 95.93 Australian cents overnight, its highest level since the Aussie was floated in 1983, as investors favour the outlook for higher interest in New Zealand, compared with Australia where rates may fall.

Rankin says the kiwi could push higher up to 97 Australian cents given the Aussie's sensitivity to falling iron ore prices but doesn't expect the cross rate to reach parity as the declining Aussie finds a base.

The kiwi has gained about 8 percent against the euro this year, recently trading at 64.46 cents from 59.54 cents at the start of the year, as the European Central Bank eyes further stimulus measures to stave off deflation.

The local currency posted a similar gain against the yen, up 8.5 percent over the year as Japanese Prime Minister Shinzo Abe went to the polls early to gain a renewed mandate for his economic reforms as the country fell into recession and the Japanese people resisted a further hike in the sales tax. The kiwi touched a seven-year high of 94.05 yen this month and was recently at 93.61 yen, from 86.19 yen at the start of the year.

The New Zealand dollar advanced 1.9 percent against its UK counterpart, recently trading at 50.38 British pence from 49.43 pence at the start of 2014.

The broad measure of the New Zealand currency, the Reserve Bank's trade-weighted index, underwent changes this month to better reflect the currencies of the nation's biggest trading partners. The TWI hit a record this year and some economists say its future gains may be muted by the changes which will give it greater exposure to currencies such as China's yuan.

New Zealand markets will be closed Thursday and Friday for the New Year holiday.