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NZ Dollar Outlook Kiwi will take lead from US Federal Reserve, economic reports

Monday 29th July 2013

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The New Zealand dollar will probably take its lead from the US this week, where traders will be looking for guidance from Federal Reserve chairman Ben Bernanke on future monetary stimulus, and reports on how the economy is tracking.

The local currency may trade between 78.60 US cents and 82.30 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Seven expect the New Zealand dollar to rise this week while three say it may fall. The kiwi recently traded at 80.86 US cents, little changed from 80.84 cents late New York trading Friday, and 80.79 cents at the 5pm close in Wellington.

Currency markets are being driven by expectations of when the Fed is likely to start tapering its US$85 billion a month asset purchase programme, which has debased the greenback. All eyes will be on this week's statement after Bernanke last month said the Fed may taper later this year and end the programme around mid-2014 as long as the economy continues to improve in line with the bank's forecasts. Economic reports this week will give him further direction.

Traders will be hoping for "clearer guidance" from the Fed this week on its assumptions and response to economic data, said Peter Cavanaugh, client advisor at Bancorp Treasury Services. "They have made it very clear that their tapering of their bond purchases is data dependent and Friday's (unemployment release) is data they will be depending on."

The Federal Open Market Committee is scheduled to meet July 30-31. The Fed has held its benchmark interest rate target at zero to 0.25 percent since 2008 to support the economy. It won't announce a decision to reduce its monthly bond purchases at this meeting, according to 54 economists surveyed by Bloomberg. Half of those surveyed said Bernanke will trim bond buying to US$65 billion in September.

The Fed has said it will consider raising its benchmark interest rate if the unemployment rate drops below 6.5 percent. Wall Street Journal writer Jon Hilsenrath, considered by some to be a mouthpiece for the Fed, said it may extend record-low rates for longer by lowering the threshold to 6 percent.

A report on Friday is expected to show the US unemployment rate ticked down in July, to 7.5 percent from 7.6 percent in June, whilst the country added 185,000 non-farm jobs, according to Reuters polls. A separate report on Wednesday is expected to say annual growth slowed to 1 percent in the second quarter, from 1.8 percent in the first quarter, according to Reuters.

Markets have been volatile as traders bet on when the Fed will start reducing stimulus in the world's largest economy. The International Monetary Fund said in a report released late last week that the Fed's exit from quantitative easing could cause excessive interest rate volatility.

Other central banks are also on the radar this week. Bank of Japan governor Haruhiko Kuroda is due to speak later today, as the yen strengthens after a report last week showed consumer prices rose more than expected. Prime Minister Shinzo Abe has pushed a plan of monetary easing and fiscal stimulus in a bid to weaken the yen and bolster manufacturers.

Australian central bank governor Glenn Stevens speaks at a luncheon tomorrow in Sydney. Traders will be looking for indications that the bank plans to cut its 2.75 percent benchmark interest rate at its next meeting on Aug. 6.

Traders are currently pricing in a 72 percent chance that the bank will cut the rate. That's up from 19 percent odds signalled at the start of this month.

The New Zealand dollar has appreciated 10 percent against the Australian dollar so far this year, touching a four-and-a-half year high of 87.74 Australian cents last week, as a weakening Australian economy contrasts with a revival in New Zealand. The local currency recently traded at 87.21 Australian cents.

Traders see zero chance that New Zealand's central bank will raise the official cash rate from 2.5 percent at its next review on Sept 12. However, they are pricing in a 61 percent chance the bank will hike in the next 12 months, based on the Overnight Index Swap curve. Expectations have increased from a 55 percent chance at the start of this month.

On Thursday, both the Bank of England and the European Central Bank are expected to keep interest rates at 0.5 percent and reiterate plans to keep monetary policy accommodative.

Also on Thursday, traders are expecting a weak report on Chinese manufacturing. The official Chinese PMI is likely to dip under 50 amid concern about a slowdown in the world's second-largest economy.

In New Zealand this week, traders will be eyeing a report on building consents tomorrow for evidence the local economy is gaining momentum from the rebuilding of earthquake-damaged Christchurch and emerging demand from Auckland.

On Wednesday, traders will be looking to the ANZ Business Outlook survey for signs of continued strength after business confidence rose to a three year high last month.

Also on Wednesday, the Reserve Bank releases data on lending to households secured by residential mortgages, while Fonterra Cooperative Group, the world's largest dairy exporter, publishes its latest forecast cash milk payout to farmers.

BusinessDesk.co.nz

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