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NZ Dollar Outlook Kiwi may fall with risk long bets are disappointed

Monday 1st October 2012

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The New Zealand dollar may fall this week with the risk that traders betting on further gains are disappointed if there are further signs of global economic weakness or the Reserve Bank of Australia fails to cut interest rates tomorrow.

The local dollar last traded at 82.78 US cents, down from 82.97 cents in late New York trading on Friday. The kiwi will trade in a range of 81.80 US cents to 83.50 cents this week, based on a BusinessDesk survey of six analysts. Four of the six said the currency may weaken this week.

The Reserve Bank of Australia's review of interest rates in New Zealand's biggest export market tomorrow is seen as a major focus for the kiwi this week. The New Zealand dollar is trading near 80 Australian cents, a level it hasn't broken through since September last year, as traders bet the RBA will cut rates a quarter point to 3.25 percent tomorrow and follow up with further cuts. Weaker demand from China has weighed on prices for Australia's raw materials such as coal and iron ore. If the RBA fails to act the kiwi could tumble.

"The kiwi-oz trade is fairly crowded - a lot of people have got on board," said Alex Sinton, senior dealer at ANZ New Zealand. "A move above 80 (Australian cents) would cause some consternation." As the kiwi has gained, "people have been scaling back their expectations."

Surveys show has a 60 percent chance of a rate cut in the RBA's monetary policy review tomorrow. Meanwhile, China releases its official manufacturing PMI this afternoon. That comes after the Chinese HSBC manufacturing PMI on Friday printed at 47.9, signalling a contraction. Market consensus is for today's data to show a return to growth at 50.1, though ANZ Bank is picking it remains in contraction.

That would add to recent evidence the Chinese economy is weakening, which bodes poorly for Australia and New Zealand, which count the Asian nation as first and second-largest export market respectively.

"The kiwi is going to step lower with the Australian dollar and that's a function of the China slowdown," said Derek Rankin, director at Rankin Treasury Advisory.

Both currencies have benefitted from money flows "scared out" of Europe looking for a relative haven and with the local currencies having extra polish from relatively high interest rates for Aaa-rated nations, he said.

Rankin says the kiwi will extend its gains against the Australian dollar, partly as a function of the relatively stronger demand for New Zealand's exports.

"We sell food, they sell rocks - at the moment food is outperforming rocks," Rankin said. "The time for exporters having an easy run into Australia are over."

Mike Jones, currency strategist at Bank of New Zealand, says an Australian rate cut is a wider concern because of what it means the RBA is thinking about the state of the Australian economy.

"There's an awful lot of good news priced into the kiwi at the moment," he said. This week "could see risk positions pared back."

Keeping a lid on trading activity is Golden Week in China, which will see many take a holiday this week.

Spain will again be at the forefront of investors' minds in coming days amid hopes the country will decide to seek financial help, though a formal request to its European Union partners might not happen until later this month.

Also on the agenda, along with the RBA, are minutes from the latest meeting of the US Federal Reserve, word from policy makers at the European Central Bank, who meet on Thursday, and meetings by the Bank of England and the Bank of Japan.

"This could be a deadly dull week because everything is as expected or it could be volatile because nothing comes out as expected," said Peter Cavanaugh, senior client adviser at Bancorp.

He says the kiwi at around 83 US cents is "looking a bit tired and the bias for the week is lower."

There's little in the way of New Zealand economic data scheduled for this week, though the ANZ Commodity Price Index due for release tomorrow and results of the latest GlobalDairyTrade auction due out on Wednesday will give an update on the prices New Zealand is getting for its overseas shipments.

The week rounds out with the September US employment report. Non-farm payrolls are forecast to have risen by 115,000, while the US unemployment rate is forecast to have edged up 0.1 percent to 8.2 percent, according to Reuters.

This week also brings the first of three presidential debates between President Barack Obama and Republican candidate Mitt Romney, on Wednesday. Obama is managing to hold a slight advantage in the polls despite the economy's lingering weakness.

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