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NZ Dollar Outlook: Kiwi may fall as markets downplay Bernanke's testimony

Monday 16th July 2012

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The New Zealand dollar may fall this week amid expectations Federal Reserve Chairman Ben Bernanke won't signal further monetary easing, while locally inflation numbers are likely to be tame enough to rule out interest rate hikes anytime soon.

The New Zealand dollar recently traded at 79.78 US cents up from 79.67 cents at 8am. That's right in the middle of this week's predicted trading range of 78.50 cents to 80.80 cents, according to a BusinessDesk survey of five analysts.

Four out of the five analysts predict the kiwi will finish the week lower, one unchanged.

Investors will be looking to Bernanke's testimony to the House of Representatives on Tuesday and Wednesday for any clues about the potential and timing for further easing to lift the pace of growth. The Fed's beige book will be released on Wednesday.

"That is the one event you want to be watching," said Imre Speizer, market strategist at Westpac Banking Corp. "If Bernanke gives the signal there will be a big risk on and the kiwi will go up."

"There is probably a higher chance that he doesn't because the data isn't dire enough to push him into it," he said.

Last month the Fed agreed to expand Operation Twist, extending the maturities of assets on its balance sheets. Policymakers have said they will take further action if needed.

New Zealand's consumer price Index will be released by Statistics New Zealand on Tuesday, with higher electricity costs, a jump in food prices and emerging pressure in building costs probably marking an otherwise tame pace of inflation in the second quarter.

CPI rose 0.5 percent in the three months ended June 30, unchanged from the first quarter, according to a Reuters survey of 16 economists.

"If it was a positive surprise it would have to have some credibility," Speizer said. "Credibility could come from the construction sector or it could be to do with the housing boom in Auckland or Canterbury."

Traders still see a small probability that the Reserve Bank will cut the official cash rate in the next 12 months, based on the Overnight Interest Swap curve, which shows 17 basis points of cuts priced in, according to Reuters data.

The kiwi gained as investors were more upbeat after better-than-expected second-quarter earnings from investment bank JPMorgan & Chase. The investment bank reported net income of almost US$5 billion in the three months ended June 30, even as its chief investment office posted trading losses of US$5.8 billion.

Four out of the six Standard & Poor's 500 companies that reported results last week surpassed analysts' earnings estimates while one missed, Bloomberg reported.

Retail sales and inflation data are also due out of the world's largest economy on Monday and Tuesday respectively.

The New Zealand dollar hit a record 65.13 euro cents, the highest since the single currency entered circulation in 2002. It recently traded at 65.08 cents. Spain is preparing to auction two-year, five-year and seven-year bonds on Thursday before euro-zone finance ministers meet to discuss the final details of the nation's bailout package after its banking sector collapsed last month.

"The European monetary policy and fiscal outlook for Europe provide the perfect storm for a weak euro," said Peter Cavanaugh, senior client adviser at Bancorp. "The New Zealand and Australian dollars are the lesser of very many evils."

The New Zealand dollar was little changed on 77.87 Australian cents from 77.73 cents at 8am. The Reserve Bank of Australia will release the minutes from its July meeting on Tuesday after it left the official cash rate unchanged at 3.5 percent.

New Zealand's BNZ-Business NZ Performance Service Index released this morning expanded at a slower pace in June, while remaining in growth for the 23rd month in a row, led by new orders/business. The seasonally adjusted BNZ-BusinessNZ Performance of Services fell 2.3 points to 54.3 in June from May and all five sub-indexes in the survey recorded expansion.

The results of Fonterra's latest GlobalDairyTrade auction will be released on Wednesday morning. Prices of dairy products fell 5.9 percent at the last auction a fortnight ago, mirroring a broader decline in New Zealand's primary sector exports.

ANZ New Zealand's job ads are scheduled for release on Thursday, followed by international travel and migration from Statistics New Zealand on Friday.

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