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NZ dollar outlook mixed on Irish debt worries, US data

Monday 15th November 2010

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The New Zealand dollar faces a mixed outlook for the week as the market awaits further news on Ireland's sovereign debt payments, a raft of US economic data and signs of more policy tightening in China.

The views of six economists and strategists in a BusinessDesk survey were almost evenly split on whether the kiwi dollar would fall or rise this week, with the focus solely on offshore developments. Three expected the currency to rise, two expected it to fall and one said there were too many uncertainties to reliably call a movement either way.

European sovereign debt concerns are likely to dominate investor focus this week, as Irish authorities square off against the European Union member countries pushing it to accept a bailout package to quell volatility. Investors are nervous that if the issue is not resolved, concern may revive on the outlook for Europe's other heavily indebted nations - Greece, Italy, Portugal and Spain. The volatility index, a measure of the cost of insuring puts on the Standard & Poor's 500 Index, rose to 20.61 today from 18.53 on Friday.

"All risk currencies are being thrown about by speculation of what is going on in Ireland," said Chris Weston, a markets analyst with IG Markets. "If Ireland takes the bailout I believe it will be good for the euro and kiwi, and if not there is the risk of yields blowing out further. The longer it goes on the more volatility we are likely to see."

He predicts the kiwi dollar will trade in a range of between 77 US cents and 79.97 cents, with strong support should it hit the bottom of the range.

Philp Borkin, an economist with Goldman Sachs & Partners, said he expects the impact from Ireland to be muted in the longer terms given that the Euro-zone economy is well placed to issue financial support.

"Europe is in a better situation than when Greece blew up, with the support packages already in place," Borkin said. "So while it is a nervy time for investors, and will definitely cause volatility in the markets the backstops are in place."

The US will still remain a focus for markets this week, in spite of Europe debt dominating headlines, with a deluge of economic data expected. US Producer price and consumer price reports are due as well as data on retail sales, business inventories and industrial production as well as housing starts, leading indicators and the Philadelphia Federal Reserve Index.

"All we need to do is get a string of reasonable data, it doesn't have to be great just half decent, and we could see the US dollar continue to move higher as more and more people who are short on the US dollar start to take that off the table," said Khoon Goh, head of market economics and strategy for ANZ New Zealand.

Goh's forecast was for the kiwi to fall against the greenback, trading in a range of 77 cents and 78 cents. He expects to see the euro decline as investors collapse their long positions.

China is also on the radar this week, after the world's second-biggest economy signaled that it may increase interest rates to cool rising domestic prices. Heightened concerns about the impact of a likely Chinese policy decision on global growth saw commodity prices fall last week. Oil prices fell 3.3% on Friday to US$84.70 a barrel, while the Reuters-CRB index, a broad measure of commodity prices, slipped 3.6%.

The Reserve Bank of Australia is expected to release the minutes of its November policy meeting tomorrow, when it lifted official interest rates by 25 basis points to 4.75 per cent. The RBA was the first Group of 20 nations country to start tightening policy when it dodged recession last year.

"We have a very bullish view on the Australian economy, and see the currency going really well, and should trade around parity," said Chris Tennent-Brown, an economist with Common Wealth Bank of Australia.

The value of New Zealand retail sales rose 0.8% to $133 million in the September 2010 quarter driven by spending ahead of the GST rate increase, according to data released by Statistics New Zealand today. Total retail sales volume rose 0.7%.

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