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NZ Dollar Outlook: Kiwi seen caught in range in data-heavy week as Euro fears linger

Monday 19th September 2011

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The New Zealand dollar may trade within its recent range in a busy week for domestic economic figures and as traders await some signs of European progress in breaking an impasse over the region’s sovereign debt crisis.

Four of the six economists and market strategists surveyed by BusinessDesk saw the kiwi trading sideways this week, with the initial risk-off tone from Europe's protracted debt crisis lifting in the later part of the week on the back of growth numbers for the second quarter. Two saw the kiwi falling as investors become increasingly bearish on the euro.

The kiwi, which recently traded at 82.60 U.S cents, may trade between a median range of 81 cents and 83.80 cents this week, according to the poll. That's in line with last week's estimates.

The kiwi dollar is broadly expected to fall early in the week as investors react negatively to the European finance ministers meeting in Poland over the weekend. At the event euro zone policymakers clashed with U.S. Treasury Secretary Tim Geithner over how exactly to tackle the crisis without actually agreeing on a further course of action.

The lack of progress disappointed investors who were hoping a new strategy would be launched after a group of major central banks last week agreed to provide U.S. dollar funding to European private sector banks, with Standard & Poor's 500 Index futures falling 13.8 basis points to 1,198.

"At the start of the week the kiwi is going to head lower given risk-off sentiment but it will be well supported on the dips," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "There are lots of reasons to like the kiwi. Yes, we are subject to global developments, but we look a heck of a lot better than other countries."

Markets will also be watching the expanded two-day Federal Open Market Committee meeting this week with interest, where U.S. Federal Reserve Chairman Ben Bernanke is expected to unveil the Fed's latest bid to jump start growth in the world's biggest economy.

The market is currently betting that the Fed will implement 'operation twist', a re-profiling of U.S. government debt to bring long term rates down and leave the short end of the curve unchanged, a move seen as supportive of business and housing markets which borrow at long term rates.

"The political tools they might unleash may be no more than minor tweaks of the bond buying they're doing at the moment," said Imre Speizer, a market strategist at Westpac Banking Corp. "It's already largely priced into the meeting and I don't expect it to have too much effect on the U.S. dollar."

Locally, the government is expected to release current account and growth data for the second quarter this week, which are both expected to paint an improving picture of the New Zealand economy, albeit at a slightly slower pace than the first quarter.

The economy is expected to have grown 0.5% in the June quarter, and current account deficit seen at $7.98 billion in the year ending June 30, down from a deficit of $8.3 billion a year ago, according to poll of economists compiled by Reuters.

The rosy view of the New Zealand economy painted by the data is likely to contrast sharply with it's Tasman neighbor, with the release of the Reserve Bank of Australia's latest policy likely to a strong resolve to keep interest rates on hold at 4.75%, although commentary likely to steer towards the dovish side of the spectrum.

Traders have an 80% chance of a 25 basis point cut priced in for the October meeting, according to the Overnight Index swap curve. By contrast the market is betting the Reserve Bank of New Zealand will raise the official cash rate by 43 basis points over the next 12-month from its current level of 2.5%, making it the only central banking the world with hikes priced in the next year.

That differential may be supportive of the New Zealand dollar against the Australian currency, which recently traded 80.24 Australian cents, having broken out of its 78 cent to 80 cent range which it has been locked in since Aug. 12.

"To our mind the growth differential and interest rate differentials look support for the kiwi," said Mike Burrowes, a market strategist at Bank of New Zealand.

Fonterra Cooperative Group's twice-monthly GlobalDairyTrade auction is schedule to take place on Wednesday morning local time, which the market will be watching closely for signs of further weaknesses in the price of milk powder.

Average prices of dairy products fell for the sixth straight sale in Fonterra Cooperative Group’s last online auction, reaching the lowest level in 10 months.

GDT-TWI Price Index fell 1.4% to US$3,580 a metric tonne two weeks ago, and have declined from 16% from their peak in March, according to the ANZ Commodity Price Index.

(BusinessDesk)

BusinessDesk.co.nz



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