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NZ Dollar Outlook Kiwi may gain if Fed announces 'QE3.5'

Monday 10th December 2012

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The New Zealand dollar may gain this week though that would likely require further new measures from the US Federal Reserve and strategists are divided on whether it would take such a step without the fiscal cliff being resolved.

The kiwi dollar recently traded at 83.32 US cents, edging up from 83.24 cents in New York on Friday after Fonterra Cooperative Group raised its forecast payout to farmers. The currency climbed on Friday following stronger-than-expected payrolls data. It may trade in a range of 82 cents to 84 cents this week, according to a BusinessDesk survey of six traders and strategists.

Three saw the kiwi going higher and three said it may struggle to break out of its recent range. New Zealand's dollar hasn't traded above 83.50 US cents since early March and if it can break through that level it has room to make further strong gains.

The Federal Open Market Committee's two-day meeting starts on Tuesday, with the final statement expected out at about 6:30am New Zealand time on Thursday. Operation Twist, in which the Fed buys longer-dated Treasuries and sells some of its shorter-dated ones, is scheduled to end this month, leading to speculation it may announce more money printing including for outright purchases of Treasuries. That would tend to weaken the greenback and drive up growth-linked currencies such as the kiwi.

"Thursday is a significant positive risk event for the kiwi," said Imre Speizer, senior markets strategist at Westpac Banking Corp.

He sees the Fed replacing Operation Twist with outright purchases of Treasuries or mortgage-backed securities, or both. "In other words QE3.5, or fresh money printing, which would boost equities and other assets further, and that will be positive for the kiwi."

But the Fed's review of monetary policy comes against the backdrop of fiscal cliff negotiations in Washington that are presently bogged in 'he said, she said' claims and counter claims between Republicans and the White House.

House Speaker John Boehner on Friday accused President Barack Obama of wasting a week without making any progress. But since then they reportedly met on Sunday at the White House in their first face-to-face meeting in a month. The two sides are so far declining to say what happened at the meeting.

If Republicans and Democrats fail to reach a budget deal in coming days, the odds rise of triggering about US$600 billion in automatic tax increases and spending cuts on Jan. 1 that may plunge the US economy back into recession.

"The risk is the later we go in the month the greater the risk nothing gets done," said Tim Kelleher, head of institutional FX sales at ASB Institutional. He doesn't expect any fresh endeavours from the Fed this week. "They'll want to keep their cards up their sleeves in case they need something in January."

There's no major economic data scheduled in New Zealand this week. Figures today showed manufacturing sales volumes rose 2.6 percent in the third quarter, three times the pace of the second quarter, led by meat and dairy sales. Electronic card spending for November is due out tomorrow and the Performance of Manufacturing Index and food prices for November are out on Thursday.

In Australia, Reserve Bank governor Glenn Stevens is scheduled to give a speech on Wednesday.

The New Zealand dollar gained last week after Reserve Bank governor Graeme Wheeler quashed expectations for an interest rate cut, citing growing inflation pressures.

"The RBNZ is more hawkish than the market thought and people are talking about interest rate increases again," said Derek Rankin, director at Rankin Treasury Advisory. As things quieten down heading into Christmas "people will be interested New Zealand yields" while exporters, heading into their busy season, and hedge funds "may buy on dips."

The kiwi dollar is trading at 64.37 euro cents, the highest since mid-November, and could extend its gains following the announcement from Italian Prime Minister Mario Monti that he plans to resign after Silvio Berlusconi's PDL party withdrew its support. Monti said he will try to get his budget approved and pass the financial stability law he leaves.

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