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Dollar outlook: Kiwi expected to hold firm amid earthquake fall-out

Monday 6th September 2010

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The New Zealand dollar will probably trade in a tight this week as investors lock-in another pause in the Reserve Bank's tightening track in the fall-out from the 7.1 magnitude Christchurch earthquake.  

Five of seven economists and strategists in a BusinessDesk survey expect the kiwi to tread familiar boundaries this week as upbeat investor sentiment after strong US employment data on Friday is tempered by another pause by central bank Governor Alan Bollard when he reviews the Official Cash Rate next week after the Christchurch quake. One strategist was neutral with a negative bias, while the last leant towards the upside.

The kiwi dollar climbed to 71.98 US cents from 71.56 cents after data showed US non-farm payrolls fell by 54,000 last month, well-short of the 104,000 predicted, as 550,000 people returned to the workforce.

The currency pared some of its gains after the earthquake, which happened during the New York trading session, prompted investors to write down the likelihood of an interest rate hike next week. The market expects Bollard to lift the OCR 57 basis points over the coming year, according to the Overnight Interest Swap curve.

"The Reserve Bank might pull back for several meetings to make sure confidence doesn't get knocked too hard," said Imre Speizer, market strategist at Westpac.

"That's a negative for the kiwi and I would expect to see it underperform."

Speizer has a negative tone for the kiwi this week and expects the currency will be capped at 72.20 US cents.

Investor sentiment is expected to be a major driver for the currency this week with most major data releases a few weeks away, and Asian equity markets are tipped to carry on the optimism after the strong pay-rolls figure. US traders will be back to work on Tuesday after today's Labor Day holiday rounds out the summer break.

Khoon Goh, head of market economics and strategy at ANZ New Zealand, said global risk appetite will push the kiwi dollar around this week, as trading desks' "A-teams get back and volumes and liquidity pick-up". He predicts the kiwi will trade in a range this week.

Several central bank meetings will be of interest for the traders, with the Australian, Canadian, Japanese and English banks reviewing their benchmark interest rates this week. Though Australia's, Japan's and England's banks aren't expected to move, traders will be looking to see whether Canada's Governor Mark Carney will hike rates to 1% on Wednesday. The kiwi fell to 74.79 Canadian cents from 75.42 cents on Friday in New York.

Mike Jones, strategist at Bank of New Zealand, said the Canadian meeting would've had more bearing on the RBNZ next week had the Christchurch earthquake not happened. Both countries are in tightening cycles and Bollard would've struggled to ignore a hike, he said.

Jones predicts the kiwi will trade between 71 US cents and 72.20 cents this week.

Australia may be drawing closer to a result in its Federal election and markets are expecting a result this week. A Labor-led minority government is looking the most likely, though that's not expected to impact on the Australian dollar cross-rate, according to IG Markets research analyst Ben Potter.

"We'll probably get a decision on the Australian government, but I don't think that will affect the New Zealand dollar," he said.

The kiwi was little changed at 78.68 Australian cents from 78.65 cents on Friday in New York.

With a tight range against the US dollar and little expected to move the cross-rates, all seven strategists expected the trade-weighted index to tread water this week. The kiwi rose to 66.81 on the TWI from 66.57 last week and gained to 60.77 yen from 60.44 yen. It edged up to 55.89 euro cents from 55.73 cents on Friday in New York, and increased to 46.60 pence from 46.44 pence.

On the data radar this week is electronic cards, value of building work put in place and overseas terms of trade, which will help economists build a better picture of second-quarter economic growth. Across the Tasman there's employment data on Thursday, while in the US the Federal Reserve releases its Beige Book on Thursday.

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