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NZ Dollar Outlook: Kiwi's direction clouded by Euro developments

Monday 14th November 2011

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The New Zealand dollar’s direction this week is likely to be dominated by further developments in Europe as the region battles to contain its debt crisis and investors take heart in new leadership for Italy and Greece.

The kiwi dollar traded recently at 78.93 US cents, up from 78.53 cents on Friday. That’s right in the middle of the currency’s forecast range for this week of 76.5 cents and 80 cents, according to a BusinessDesk survey of six analysts.

The currency’s direction “will continue to be around Europe,” said Mike Burrowes, currency strategist at Bank of New Zealand. If progress stalls, “markets will start to get impatient.”

Growth-linked assets including the kiwi dollar, equity markets and commodities rallied on Friday on optimism new leadership in Italy and Greece will speed reform in the indebted economies and limit the chances they default on interest payments, dragging the region down and slowing the global economy.

Italy yesterday appointed former European Commission Mario Monti to lead a government that will implement reforms after former Prime Minister Silvio Berlusconi was forced to step down.

Meantime in Greece, new Prime Minister Lucas Papademos will attempt on Monday to push ahead with austerity measures that are a requirement for that nation to get more financial aid from Europe. He will also be welcoming inspectors from the International Monetary Fund, European Central Bank and European Union.

Papademos is scheduled to attend a meeting of European finance ministers in Brussels on Tuesday, where he is to outline Greece’s draft budget

The kiwi dollar has lurched between about 82 US cents and 77.28 cents in the past two weeks, as markets reacted to the unfolding drama in Europe.

The kiwi dollar’s track from here is also likely to be “wild and wonderful,” according to HiFX currency strategist Michael Hollows.

The New Zealand dollar advanced today after figures showed retail spending in the third quarter grew at the fastest quarterly pace since December 2006, helped by the inflow of tourists for the Rugby World Cup.

The total volume of spending rose 2.2 percent, more than twice the 0.7 percent forecast in a Reuters survey of economists. Stripping out motor vehicle related spending, the core figure climbed 2.4 percent.

Other figures showed the Performance of Services Index (PSI) for October weakened by 2.3 points to 50.6 from September, just above the level of 50 that separates expansion from contraction. The PSI followed the Performance of Manufacturing Index last week, which showed that sector has fallen into contraction.

Investors are also awaiting the release tomorrow of the minutes of the Reserve Bank of Australia’s latest policy meeting, where it cut its target rate a quarter point to 4.5 percent.

By contrast, New Zealand’s central bank is expected to raise interest rates over the next 12 months to counter resurgent inflation as the economy recovers and the rebuilding of Christchurch gets underway.

Also on the radar are US retail sales and inflation data, after a run of more upbeat data from America, including a recovery in consumer confidence.

Two weeks out from the general election, there’s little sign yet that traders are betting on the outcome. The ruling National Party could rule alone, based on the latest Fairfax Media poll, while the New Zealand Herald’s survey suggests it would need to form a coalition.

Rankin Treasury Advisory director Derek Rankin said investors are waiting to see the "chemistry of the new government."

The results of Fonterra Cooperative Group’s latest online auction are published on Wednesday, with prices having declined in nine of the past 10 sales. Dairy products are New Zealand’s biggest export and the fortunes of dairy farmers tend to drive the local economy and the kiwi dollar.


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