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NZ Dollar Outlook: Kiwi may hold above 70 USc

Monday 25th January 2010

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The New Zealand dollar, which tumbled 3.9% last week on reduced risk appetite, will likely hold above 70 US cents over the next five days as investors await the central bank’s interest rate review and inflation data in Australia, the nation’s biggest export market. 

Four of six economists and strategists in a BusinessWire survey predict the currency will trade at its current level or decline this week as investors eschew riskier assets in favour of the relative safety of the greenback and yen.

One forecasts it will stay in its current range with a bias to the upside, while the last predicts the kiwi will gain this week after hitting a trough below 71 US cents.  

Reserve Bank governor Alan Bollard is expected to hold the OCR at a record-low 2.5% on Thursday, and economists are now forecasting the bank will stick to its “middle of 2010” timeline previously indicated for rate hikes.

Consumer prices fell 0.2% in the three months through December, in line with Bollard’s forecasts, and the markets are betting he will hike rates 179 basis points over the next 12 months, according to the Overnight Swap curve, down from 200 points last week.  

“We’re not going to see rate increases probably until closer to the middle of the year,” said Mike Symonds, head of sales and forex at Bank of New Zealand. “We’ve seen quite a sell-off in the kiwi already, and there’s probably going to be good support around 70.50 U.S. cents, with limited rallies to 72 cents.”  

The kiwi dollar has come under pressure over the past week as sentiment for higher yields has been sapped by the prospect of Chinese officials looking to cool off the world’s third-largest economy amid accelerating inflation, while American President Barack Obama earmarked regulation to limit banks’ risk-taking a day after the Democrats lost control of the Senate.

The currency sank from US 71.48c to 71.15 cents on Friday in New York.  

Robert Rennie, chief currency strategist at Westpac in Sydney, said with Wellington on holiday for its regional anniversary today and Australia Day tomorrow, movements in the trans-Tasman currencies will probably be limited, though he doesn’t see much scope for a decline in the kiwi this week.  

“On a psychological level, the closer it goes to 70 US cents, the more I think it’s going to hold,” he said.  

Australian inflation probably accelerated at a quarterly pace of 0.4%, according to a Reuters survey, and the data will have a large bearing on whether the Reserve Bank of Australia will hike interest rates for a fourth straight time when it meets next week. The kiwi edged up to 78.92 Australian cents from 78.81 cents on Friday in New York.  

Chris Tennent-Brown, economist at Commonwealth Bank of Australia, said a strong CPI number could knock the kiwi against the Australian cross as investors “firm up expectations” of a rate hike by the RBA.  

“We should see support from that cross rate at these levels,” Tennent-Brown said.  He is the only economist surveyed tipping the kiwi to rise against the US dollar this week.

The kiwi last dipped below 70 US cents just before Christmas, and hasn’t closed below that level since September.  

US President Obama will give his State of the Union address on Wednesday, and investors will be looking to see if he fleshes out the details of his proposal to curb banks’ trading.

The Federal Open Market Committee will review the benchmark interest rate in the US, and while it’s expected to have a “business as usual” attitude, Federal Reserve chairman Ben Bernanke’s reappointment is becoming uncertain after he lost some support in the Senate.

American gross domestic product data and the fourth-quarter reporting season will also have a bearing on investor sentiment, and whether risk appetite will be revived this week.  

Derek Rankin, director of Ranking Treasury Advisory, said risk has been taken off the table this year with investors still unclear as to the direction of the markets.

Though he predicts the kiwi will gain against the U.S. dollar in the longer-term, he expects it to remain in a range this week with a positive bias.  

Five of six economists surveyed predict the kiwi will trade in a range or decline this week on a trade-weighted basis, with one forecasting a rise. The TWI dropped to 64.82 from 65.16 on Friday in New York.  

The Bank of Japan will review its monetary policy, and is expected to retain its benchmark interest rate at 0.1%, though it may expand its emergency loan programme and boost its purchases of government debt. The kiwi sank to 64.10 yen from 64.53 yen on Friday in New York.  

Ongoing fears about Greece’s fiscal position have kept the euro under pressure in recent weeks as investors continue to eschew higher yields. The New Zealand dollar dropped to 50.32 euro cents from 50.57 cents last week, and gained to 44.20 pence from 43.96 pence.  

On the data radar this week is December’s spending on credit cards tomorrow, and last month’s building consents issued and trade figures on Friday. The Treasury will also put out the government’s fiscal position for the five months through December on Friday.

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