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NZ Dollar Outlook Kiwi may rise on Spanish rescue deal as RBNZ looms

Monday 11th June 2012

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The New Zealand dollar may finish the week higher as markets digest a 100 billion euro rescue package for Spain's banks and the Reserve Bank review's the official cash rate on Thursday.

The New Zealand dollar recently traded at 77.63 US cents, up from 77.53 cents at 8am and 76.97 cents at the close of trading in New York on Friday. That's right in the middle of this week's predicted trading range of 76.50 cents to 78.50, according to a BusinessDesk survey of five analysts.

Four out of the five analysts surveyed said the kiwi will finish the week higher, while one said it will finish the week lower.

Spain will become the fourth euro-zone nation to receive a financial bailout after European Union finance ministers agreed to shore up the nation's banking sector following an emergency conference call over the weekend. Leaders didn't make clear whether the loans would come from the region's permanent support fund, the European Stability Mechanism or its temporary European Financial Stability Fund. The EU and IMF have now committed half a trillion euros in euro-zone bailouts.

"It is simply another measure to stop the crisis spreading to other counties," said Peter Cavanaugh, senior client adviser at Bancorp. "The government is doing okay but the burden of the banks bailout would be too much."

Spain's aid comes a week before Greece's second round of elections on June 17. The result will be closely watched by markets in the event voters deiced to elect a government that decides to leave the region's shared currency.

"It will be the global pictures that will continue to determine the kiwi's direction," said Mike Jones, market strategist at Bank of New Zealand. "We will see focus quickly shift back to Greece - the elections will be pretty tough to call so the New Zealand dollar will be tossed around on global whims."

Germany, the Netherlands, Austria and Italy are preparing to sell bonds this week. The Netherlands will sell up to 2.5 billion euros of 2033 bonds on Tuesday, while Germany is set to offer 5 billion euros of 2022 bonds on Wednesday.

In New Zealand traders have pared their bets that the Reserve Bank will follow Australia in cutting interest rates at Governor Alan Bollard's quarterly Monetary Policy Statement review on Thursday. A tepid local recovery and global risks, especially in Europe are likely to keep the official cash rate unchanged at 2.5 percent, according to all 14 economists in a Reuters survey.

"A dovish statement consolidated with no signal to cut rates will cause a fall in interest rates and the kiwi," said Imre Speizer, market strategist at Westpac Banking Corp.

Reserve Bank of Australia Governor Glenn Stevens cut the target cash rate by 25 basis points to 3.5 percent, last week. That's the smallest gap between the Trans-Tasman benchmark rates since November 2009.

In China, New Zealand's second largest export market, the People's Bank of China unexpectedly cut interest rates to 0.25 percent on Friday to help stimulate its economy, while European Central Bank and Bank of England policy makers kept rates unchanged.

The New Zealand dollar increased to 61.61 yen from 61.16 yen at the close of trading in New York on Friday as the Bank of Japan also prepares to meet this week. The BOJ is not expected to announce any new initiatives after its left asset-purchases unchanged at its May meeting. The central bank now regards asset purchases as its key monetary easing tool.

In the world's largest economy, the US, there is a raft of data set for release this week, with producer prices and retail sales due out on Wednesday, followed by the consumer price index and initial weekly jobless claims on Thursday.

New Zealand's accommodation survey for April and electronic card transactions for May are scheduled for release on Tuesday followed by the food price index on Thursday from Statistics New Zealand. The ANZ Roy Morgan Consumer Confidence survey will be released on Friday.

BusinessDesk.co.nz

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