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Dollar outlook: All Eyes on Bernanke

Monday 18th October 2010

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The New Zealand dollar is near the top of its range and will probably stay in a holding pattern until the US Federal Reserve makes up its mind as to when, and how much, it will spend to prime economic activity.  

All seven economists and strategists in a BusinessDesk survey have the currency in a tight trading band this week as markets try to figure if and when the Fed will embark on a second round of quantitative easing.

Three of the seven have an upward bias, though no-one predicts the kiwi will break through its October 2009 high of 76.44 U.S. cents.  

The kiwi pared some of its gains on Friday after investors were disappointed by a speech from Bernanke where he indicated his support for more asset purchases, but gave no hint on size or timing.

The currency recently traded at 75.32 US cents from 75.88 cents on Friday in New York.  

"It seems nothing is going to change until we get past the Fed meeting in November," said Robin Clements, an economist at UBS New Zealand.

"We had the speech from Bernanke over the weekend which was a bit disappointing so that lead to some weakening on the US dollar. This is going to be an ongoing trend." 

Clements said a softer greenback will stoke investors' appetite for the Australian dollar, which briefly touched parity with the US currency on Friday in New York, and this will drag the kiwi higher.  

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the markets have fully-priced in the value of the Fed's quantitative easing programme, with speculation it would be about US$500 billion to US$600 billion. After Bernanke's speech, that's left the market open to disappointment, he said.  

Last month, the Fed indicated it was paying more attention to its soft domestic inflation after it failed to reign in high levels of unemployment.  

Inflation in New Zealand slowed to an annual pace of 1.5% in the 12 months ended Sept. 30, according to government data released today. That kept the kiwi dollar under pressure as the softer consumer price index data gave Reserve Bank of New Zealand Governor Alan Bollard more room to keep interest rates lower for longer in his bid to revive a flagging recovery. 

Fonterra's online milk powder auction on Wednesday may push the currency around if it produces an unexpected result, but the shift to fortnightly sales has reduced the impact of the event on the kiwi.

Darren Gibbs, chief economist at Deutsche Bank NZ, said he doesn't expect to see a change in dairy prices. He predicts the kiwi will trade between 75.70 US cents and 76.50 cents.  

Robert Rennie, chief currency strategist at Westpac in Sydney, said there's a risk the weakness in the US dollar has stretched itself too far, with the US government working to take the heat out of the so-called "currency wars".

He expects the kiwi will trade between 74.50 US cents and 76 cents this week, with offshore events the major catalyst for movements.  

All seven strategists surveyed expect the currency will stay within familiar ranges on a trade-weighted basis, though four expect the kiwi to fall against the Aussie dollar.  

The kiwi slipped to 66.74 on the trade-weighted index of major trading partners' currencies from 66.82 on Friday in New York, and rose to 76.25 Australian cents from 76.15 cents.  

The Reserve Bank of Australia releases the minutes from its last meeting tomorrow, and traders will be looking to see why Governor Glenn Stevens held rates at 4.5%.

The market was surprised by the pause, and is leaning in favour of a rate hike next month.

Investors expect the RBA to lift rates by 49 basis points over the coming 12 months, according to the Overnight Interest Swap curve.  

The German IFO survey of business sentiment due on Friday should give another indication as to how Europe's biggest economy is faring, while Bank of England meeting minutes on Wednesday may show whether the UK's central bank is looking at another round of quantitative easing.

In the meantime, the US Treasury has delayed its report on international currencies until after the G-20 leaders' summit in November, with Treasury Secretary Tim Geithner saying the department has recognised China's moves to appreciate the yuan.  

The kiwi rose to 54.01 euro cents from 53.84 cents on Friday in New York, and fell to 47.12 pence from 47.32 pence.  

On the data radar this week is the Bank of Canada's monetary policy announcement on Tuesday, Chinese economic data on Thursday, and US earnings season continuing.

The Fed's Beige Book on Thursday will be watched, as will the upcoming meeting of G-20 finance ministers where currencies are likely to be discussed.

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