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Dollar outlook: Kiwi on the ascendency as market shuns greenback

Monday 4th October 2010

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The New Zealand dollar will probably extend its run higher this week after hitting a 10-month high amid heightened prospects of the US Federal Reserve printing money to address its slow pace of inflation and dismal labour market.  

All seven economists and strategists in a BusinessDesk survey predict the kiwi will try to push higher this week, though the extreme weight against the greenback boosts the risk of a sharp correction.

The kiwi climbed 1% on Friday after two American central bankers threw their weight behind more asset purchases from the Federal Reserve.

It recently traded at 74.39 US cents from 73.70 cents on Friday in New York. New York Fed President and vice-chairman on the Federal Open Market Committee, William Dudley, told reporters inflation and the outlook for jobs growth was "unacceptable" and further central bank action was probably warranted.

The Chicago Fed's Charles Evans said he favours more quantitative easing, though unlike Dudley, he doesn't have a vote on the Federal Open Market Committee.  

"We've got the market expecting the Fed to print more money, which will devalue the US dollar," said Derek Rankin, director of Rankin Treasury Advisory.

With the 74 US cents level now broken, investors have set 76 cents  as a target, "with the long-term target remaining 80 cents early next year".

The major influence will come from American employment data out on Friday, with a soft labour market weighing on the prospects of the US recovery.

Jobs growth is forecast to be flat, and will keep the greenback under pressure, Rankin said.  

"The problem with US data is that they need it to be very good" for the market to reassess its positioning and it's "still patchy," he said.  

The New Zealand Institute of Economic Research's quarterly survey of business opinion out tomorrow will probably show companies are still pessimistic about the prospects for the economy, and will give Reserve Bank Governor Alan Bollard more breathing space to hold rates lower for longer.

Bollard kept the official cash rate at 3% last month, and reined in the forecast track of rate hikes by more than a percentage point over the coming few years. 

With the Reserve Bank of Australia meeting tomorrow and looking likely to hike the target cash rate a quarter-point to 4.75%, the disparity between the trans-Tasman nations is expected to increase.  

Robin Clements, economist at UBS New Zealand, said "between the QSBO being soft, and the RBA likely to hike" the kiwi will probably be dragged up against the greenback as the Australian dollar has another go at parity with the world's reserve currency.  

Chris Weston, an institutional dealer at IG Markets in Melbourne, said the Australian dollar will probably have its best chance of reaching parity with the greenback as investors keep shunning the American currency while Australia's economy hums along on the Chinese boom.  

"If it's going to happen at all, it will happen now," he said.  

Weston was upbeat on the kiwi's prospects against the greenback, but expects it to continue struggling against the Australian dollar as the divergence between the nations becomes more and more apparent.

The kiwi gained to 76.54 Australian cents from 76.10 cents on Friday in New York.  

Today's release of the ANZ Commodity Price Index will probably show an increase in the prices achieved for local raw materials, though traders will be keeping an eye on Fonterra's latest online milk powder auction.

Rising dairy prices have underpinned an improvement in New Zealand's trade balance in recent months.  

All seven strategists surveyed are less upbeat about the kiwi's outlook on a trade-weighted basis, with gains against the greenback likely to be offset by weakness against the euro and the Australian dollar.

The kiwi gained to 66.63 on the trade-weighted index of major trading partners' currencies from 66.32 last week.  

Traders will be watching for any hints of intervention from the Bank of Japan, with the yen near the level where the central bank last intervened. It recently traded at 83.35 yen per US dollar from 83.43 on Friday in New York, while the kiwi rose to 62 yen from 61.37 yen last week.  

A slew of central bank meetings, including the Bank of England, European Central Bank and the Bank of Japan, will keep investors looking to see how regulators are viewing the world's global recovery.  

On the data radar this week is Australian unemployment on Thursday, and US housing data today.

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