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Kiwi's rally to two-month high may falter

Thursday 15th July 2010

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The New Zealand dollar’s rally to a two-month high against the greenback may falter after the Federal Reserve gave a downbeat picture of the US economy, stoking concern the global recovery is running out of steam.  

The US economic outlook has softened, according to the Federal Open Market Committee’s minutes, and Fed officials are concerned about lingering unemployment, which dropped to 9.5% in June.

The grim data weighed on Wall Street, which ended mixed, though a surge in the S&P Futures market coincided with a 70 basis point jump in the kiwi. Traders have started preparing for a second interest rate hike in two weeks by the Reserve Bank, ahead of tomorrow’s consumer price index data which is expected to show inflation held at a relatively benign 0.5% in the three months through June.

“It was very much an evening of modest trading in the markets – risk markets are tiring” after their recent rally, said Imre Speizer, markets strategist at Westpac Banking Corp.

“The kiwi has outperformed most currencies and had a good run since 1 July – the two weeks of good rallies needs to be corrected at some point, and it looks technically likely at this point.”

The kiwi climbed as high as 72.55 US cents from 71.74 cents yesterday, and recently traded at 72.28 cents. It gained to 68.30 on the trade-weighted index of major trading partners’ currencies from 67.90, and increased to 63.75 yen from 63.58 yen. It jumped to 81.83 Australian cents from 81.35 cents yesterday, and advanced to 56.71 euro cents from 56.46 cents. It rose to 47.35 pence from 47.01.

Speizer said the currency may trade between 71.50 US cents and 72.55 cents today, with the possibility of a pull-back after its recent rally. A slew of second-quarter Chinese data, including retail sales, gross domestic product, and industrial production, out this afternoon will give the currency its cues, he said.

The kiwi has held up well against its Australian counterpart in spite of the divergence in data from the two nations, which shows New Zealand’s recovery is still lagging behind its neighbours.

Speizer said the cross-rate has been underpinned by the likelihood of an interest rate hike by the RBNZ in two weeks, in contrast to the debate as to whether the RBA will go next month. Traders are betting New Zealand’s central bank will hike the official cash rate 131 basis points in the coming year, according to the Overnight Index Swap curve.

Investors will also keep an eye out for the Business New Zealand-BNZ performance of manufacturing index out today.

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