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NZ Dollar Outlook Kiwi may fall as Fed decision looms, Cyprus unnerves markets

Monday 18th March 2013

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The New Zealand dollar may fall this week, with the US Federal Reserve's statement on Thursday and fallout over Cyprus's bailout likely to trump local economic growth and balance of payments data.

The kiwi dollar recently traded at 82.23 US cents, down from 82.72 cents in New York trading on Friday. It may trade in a range of 81 cents to 83.50 cents this week, little changed in the past month, according to a BusinessDesk survey of five traders and strategists. Four of the five see it weakening this week.

The kiwi dollar dropped when it opened from trading in Wellington after news over the weekend that the European Union had proposed docking the savings of Cyprus's savers as part of a 10 billion euro bailout.

While Cyprus's financial woes are small compared to larger neighbours such as Greece, investors are pondering the prospects of contagion. Meantime Fed watchers will be looking for any forecast revisions that hint at the end to quantitative easing, even though chairman Ben Bernanke's testimony may be that QE must remain.

If the Fed upgrades forecasts to the point where the market sees an end to QE, "then that's going to be negative for risk appetite and positive for the US dollar and interest rates," said Imre Speizer, senior markets strategist at Westpac Banking Corp. "That would be negative for the kiwi against the US dollar."

Speizer said the kiwi "is looking soggy" as it has done since breaking below 83 US cents in late February.

Cyprus's politicians are due to vote on the austerity measures overnight as its citizens reportedly rush to withdraw funds from bank accounts. Speizer said investors will be watching for any signs of possible bank runs in neighbouring countries such as Portugal, Spain or Italy.

Tomorrow, the Reserve Bank of Australia releases minutes of its last policy meeting, which may provide clues to whether the bank will cut interest rates, after stronger-than-expected employment data last week prompted traders to trim bets on lower rates.

The kiwi last traded at 79.42 Australian cents from 79.43 cents in New York on Friday and down from as high as 82.34 cents on Feb. 15.

Wednesday brings balance of payments data for the fourth quarter, which is expected to show the annual current account deficit widened to $10.28 billion, or 4.9 percent of GDP, according to a Reuters survey. Figures on Thursday are expected to show the economy grew 0.9 percent in the fourth quarter, speeding from the third quarter's 0.2 percent pace.

"The GDP is historical in nature," said Dan Bell, senior trader at HiFX who is picking a downward bias on the kiwi for the week.

He's watching for developments in Europe, saying he has been surprised markets have been so calm about the region. What's happening in Cyprus "highlights the on-going challenges" that Europe faces.

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