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Dollar outlook: Kiwi to target US74c as greenback looks fragile

Monday 27th September 2010

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The New Zealand dollar will likely test 74 US cents this week as investors continue to eschew the greenback amid heightened expectations the Federal Reserve will ramp up its asset purchase programme.

Six of seven economists and strategists in a BusinessDesk survey predict the kiwi will attempt to break the top of its recent ranges after the Federal Open Market Committee said it will consider buying more Treasuries and mortgage-backed securities if inflation stays subdued. Four economists surveyed predict the New Zealand dollar will trade in a range this week, one has an upward bias and two predict the currency will close the week stronger.

The US dollar hit a seven-month low 79.27 on the Dollar Index, a measure of the greenback against a basket of six currencies, as investors kept it on the back-foot amid the prospect of more quantitative easing. The kiwi rose to 73.57 US cents from 72.81 cents on Friday in New York as traders looked for higher-yielding assets with stronger data out of the US and in Europe stoking risk appetite.

"In that kind of environment, everybody's backing out of the US dollar," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

"Seventy Four US cents is the likely resistance line for the kiwi" and will be open to a break higher with the weakness in the greenback, he said.

Goh said the kiwi's finding support from investors amid the prospect of higher interest rates across the Tasman when the Reserve Bank of Australia reviews its target cash rate next week.

A bullish speech from Governor Glenn Stevens last week encouraged markets to price in more rate hikes by the RBA, and investors predict the central bank will hike its benchmark interest rate by 56 basis points over the coming year, according to the Overnight Index Swap curve.

Though support for the Australian dollar will flow into the kiwi, it will also keep the New Zealand dollar under pressure on the cross-rate. The kiwi was little changed at 76.56 Australian cents from 76.534 cents on Friday in New York.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said the two economies are clearly different, and the market is "looking for a 75 handle on that cross".

Local data is fairly light on both sides of the Tasman this week and investors will be looking to the US for direction. August's Personal Consumption Expenditure deflator will closely followed after the Fed flagged inflation as an important barometer as to whether it will print more money.

Imre Speizer, market strategist at Westpac, said any indications inflation is falling will probably stoke investors to sell the US dollar holdings and offer support for the kiwi. He predicts the kiwi will trade in a range of 72.20 US cents and 74.20 cents this week.

Five of seven strategists surveyed predict the kiwi will trade in a range on a trade-weighted basis, with support for the US dollar, which has the strongest weighting, holding up the index. The other two predict the kiwi will fall on the trade-weighted index this week. It rose to 66.57 on the TWI from 66.37 on Friday in New York.

Japanese Prime Minister Naoto Kan talked down any intervention from the Bank of Japan on Friday saying he hadn't heard of any action by the central bank. Japan's currency spiked about 1% against the kiwi, and recently traded at 62.01 yen from 61.09 yen on Friday in New York. It strengthened to 84.36 yen per US dollar from 84.68 last week.

Westpac's Speizer said the Bank of Japan looks like it's targeting 82 yen per US dollar, and that will keep yen cross-rates range-bound.

The kiwi fell to 54.54 euro cents from 54.70 cents on Friday in New York, and was unchanged at 46.45 pence, after Germany's IFO survey of business confidence rose to two-year high, and eased concerns about the state of Europe's economy.

Rankin said the kiwi will probably stay under pressure against the euro this week as markets prepare for more upbeat data out of Europe.

On the data radar this week is August's building permits issue and the National Bank Business Outlook on Thursday, and the trade balance on Wednesday. Tax changes come into effect on Friday, with lower personal income tax, but higher consumption tax.

Markets will be keeping an eye on US housing and manufacturing data on Thursday and Friday, as well as second-quarter GDP data from the US on Friday. Fed chairman Ben Bernanke will be one of several central banks speaking this week when he testifies to the Senate on Thursday.

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