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NZ Dollar Outlook Kiwi may gain in afterglow of GDP as Cyprus hurdle looms

Monday 25th March 2013

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The New Zealand dollar may gain as investors are drawn to the relative outperformance of the local economy in a week front-loaded with risk around Cyprus's deadline to agree terms for a bailout by the end of Monday.

The kiwi recently traded at 83.48 US cents from 83.52 cents in late New York trading on Friday in New York. The trade-weighted index slipped to 76.48 from 76.53. It made trade in a range of 82.20 US cents to 84.50 cents this week, with a bias to the topside, according to a BusinessDesk survey of five traders and analysts.

Cyprus is the third-smallest euro-zone economy and the proposed 10 billion euro bailout is insignificant in terms of the region but traders are fretting the risk of contagion to larger neighbours and the precedent if the island nation leaves the common currency. The Telegraph newspaper quoted UK Independence Party leader Nigel Farage as urging Britons to pull their money out of Spain to avoid "a big flight of money."

"It's a big dice roll," said Alex Sinton, senior dealer at ANZ New Zealand. "They are probably not going to let Cyprus drop into a big black hole over such a small amount. We're still tracking pretty good underlying support for the kiwi."

The European Central bank imposed today's deadline for bailout, threatening to cut off emergency funding to Cypriot banks if a deal can't be struck. President Nicos Anastasiades held last minute talks with lenders yesterday though his government is divided and Cypriots are on the streets protesting, Reuters reports.

The kiwi dollar rose to 64.36 euro cents from 64.22 cents. The Cyprus impasse adds to euro zone gloom as the regional economy was this month confirmed in recession with a 0.6 percent decline in gross domestic product in the fourth quarter. By contrast, figures last week showed New Zealand GDP grew 1.5 percent in the fourth quarter, almost twice the 0.8 percent pace forecast by the Reserve Bank.

The kiwi "is bathing in the afterglow of the GDP data last week," said Mike Jones, market strategist at Bank of New Zealand. "The New Zealand economy is outperforming."

That's one of the net positives for the kiwi, along with the Federal Reserve's affirmation that it will continue with its asset purchases, he said. The local currency may also get a boost this week from the fact that net long positions in the US dollar are at about the highest level since 1999 and that positioning could be wound back with the approach to Easter, Jones said.

Major offshore investors appear to continue to have a favourable view of New Zealand. Pacific Investment Management Co., manager of the world's biggest bond fund, said it wouldn't be concerned if New Zealand were to delay its budget surplus target beyond 2015 provided any government spending boosts growth, Bloomberg reported.

Scott Mather, Pimco's head of global portfolio management, said such a delay probably wouldn't have a big impact on bond investors or the currency markets.

"Comments like the ones out of Pimco not being too concerned about prolonging of the surplus attainment should find reasonable support" for the kiwi, said ANZ's Sinton.

There's little local economic data out this week to catch the attention of traders. Merchandise trade figures for February are due out on Tuesday and are expected to show a seasonal surplus of $17 million as exports rise, from a $305 million deficit a month earlier, based on a Reuters survey.

Traders will be watching tomorrow's speech by Reserve Bank of Australia governor Glenn Stevens after strong employment data prompted people to reduce bets the RBA will cut interest rates again anytime soon.

"It would be in everybody's interest for the speech to be more of the same - that he's content with monetary policy settings and waiting to see the effects of the last 18 months," said Peter Cavanaugh, senior client adviser at Bancorp Treasury Services.

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