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NZ Dollar Outlook: Kiwi may cede gains as CPI looms, eyes on Europe

Monday 16th April 2012

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The New Zealand dollar may give up some of its gains this week with inflation figures expected to confirm there is little pressure on the Reserve Bank to raise interest rates this year.

The local currency recently traded at 82.22 US cents, down from 82.48 cents at 8am this morning. That’s right in the middle of this week’s range of 81 cents to 83.50 cents, according to a BusinessDesk survey of five analysts.

Three of the five say the kiwi will finish the week higher, one higher and one declined to give a forecast.

An increase in the government excise on tobacco probably drove up the consumer price index in the first quarter, masking a benign inflation outlook that gives the Reserve Bank little reason to raise interest rates this year.

CPI rose 0.6 percent in the first three months of 2013, for a year-on-year increase of 1.6 percent, according to a Reuters survey of 14 economists.

“CPI is going to be a biggie for us,” said Imre Speizer, market strategist at Westpac Banking Corp. “There will be international attention on the dollar after that - if it is a negative number it could spoil the party.” “The kiwi will be vulnerable because a small negative may delay the Reserve Bank’s cycle even longer,” he said.

In March, Reserve Bank Governor Alan Bollard held the official cash rate at 2.5 percent saying the strength of the kiwi dollar would keep interest rates lower for longer.

Across the Tasman, minutes from the Reserve Bank of Australia’s April meeting will be released on Tuesday after the central bank held its target cash rate at 4.25 percent.

In Europe, Spain set to sell two- and 10-year bonds on Thursday, while Germany is also preparing to sell debt this week. The yield on Spanish government bonds rose for a second week amid concern the European Central Bank isn’t doing enough to boost liquidity and prevent the region’s debt crisis from spreading.

“The market is voting with its feet – they (Spain) are on the edge of the red zone,” said Peter Cavanaugh, senior client adviser at Bancorp. “What they did with the LTRO (long term refinancing offer) was quite innovative but it depends on how many innovations they can keep producing.”

Policymakers in China, New Zealand’s second-largest export market, widened the yuan’s trading band to one percent from 0.5 percent.

Premier Wen Jiabao has said he wants to achieve a free-floating currency, targeting higher domestic consumption and an enlarged global role for the yuan. That means China will have to reduce its cash and government bond reserves, and is expected to increase buying of trading partner currencies, such as the kiwi and Australian dollars, strategists say.

“What has not been priced in is the China band widening,” Speizer said. “That is a positive for Asian equity markets and currencies – the kiwi should benefit.”

In the US, the world’s largest economy, a big week of first-quarter earnings may continue to lift the mood, with 75 percent of the 32 companies in the S&P 500 that reported last week exceeding Wall Street’s expectations. This week 91 companies are set to announce their results.

US data released this week includes the Empire State and Philadelphia Federal Reserve's manufacturing surveys, retail sales, housing starts and existing home sales.

New Zealand’s food price index released this morning showed prices fell in March, adding to evidence that inflation is benign. The index fell 1 percent last month, according to Statistics New Zealand and prices declined for all five sub-groups measured, the first time that has happened since October 2009.

The BNZ – BusinessNZ Performance Service Index, released today, showed the pace of expansion in New Zealand’s service sector fell 1.9 percent in March to a seasonally adjusted 53.9. A reading above 50 indicates expansion.

Figures from the Real Estate Institute showed home sales climbed 25 percent last month as the property market continued to recover from its 2011 lows.  ANZ Job Advertisements are scheduled for release on Thursday.

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