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NZ Dollar Outlook: Kiwi may fall before Europe's summit, OCR review

Monday 5th December 2011

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The New Zealand dollar may fall in a week dominated by last-ditch talks among European leaders to resolve their debt crisis and central bank interest rate reviews both at home and in Australia.

The kiwi dollar traded recently at 77.85 US cents, down from 77.97 cents in late New York trading on Friday. That’s in the middle of the forecast range for the week of 76.30 US cents to 80 cents, according to a BusinessDesk survey of six analysts. Three say the currency will fall, two see it unchanged and one predicts the kiwi will rise by the end of the week.

Reserve Bank Governor Alan Bollard releases his first review of monetary policy since the Nov. 26 election on Thursday, with all 13 economists in a Reuters survey predicting no change in the official cash rate from its current record low level of 2.5 percent. Bollard flagged the risks of Europe’s sovereign debt crisis slowing the global economy in his last review of interest rates in October and economists expect him to reiterate that view this week.

New Zealand interest rates are still relatively attractive enough to lure overseas funds, underpinning demand fro the kiwi dollar, with benchmark rates in the US and Japan near zero and Australia set to cut borrowing costs.

Australia’s central bank reviews interest rates tomorrow and is forecast to cut its cash target a quarter point to 4.25 percent, and among other central banks reviewing rates this week, the Bank of England releases its assessment of its 0.5 percent bank rate on Dec. 8.

“The kiwi will be dragged from pillar to the post” this week, with any of the central bank meetings having potential to rattle financial markets, said Mike Hollows, currency strategist at HiFX.

Before the Dec.9 summit of European leaders, French President French President Nicolas Sarkozy and German Chancellor Angela Merkel are to meet today to work on a common proposal to take to the summit. France and Germany have been at loggerheads over the role of the European Central Bank, with Merkel wanting to limit its ability to bail out heavily indebted nations.

Germany and France have to work on creating “closer fiscal ties because you can’t just have a monetary tie,” Hollows’ said.

If a deal can be forged at the summit then the pressure on euro zone government bonds yields may ease from their recent highs.

The US is to weigh in as well. Treasury Secretary Timothy Geithner will fly to Europe for talks with German, French, Spanish and Italian leaders and officials. Geithner will meet Sarkozy, Italian Prime Minister Mario Monti and ECB President Mario Draghi during his Dec. 6-to-Dec. 8 trip.

Also out this week is Australia’s economic growth figures for the third quarter, which are expected to show New Zealand’s biggest export market slowed to a 1 percent pace of growth from 1.2 percent previously. Annual growth may have accelerated to 2.1 percent from 1.4 percent.

On Wednesday, the results of Fonterra’s latest auction of dairy products on the globalDairyTrade platform are released. In the last sale two weeks ago, average prices had their biggest gain since June 1 and currency traders will be watching fir further signs demand is picking up for New Zealand’s biggest export.

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