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NZ Dollar Outlook: Kiwi may decline as slide in oil weighs on inflation concerns

Monday 1st December 2014

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The New Zealand dollar may decline this week as falling oil prices add to concerns about weak inflation, whilst a strengthening US economy drives the greenback higher.

The local currency may trade between 76.50 US cents and 79.70 cents this week, according to a BusinessDesk survey of 11 traders, strategists and brokers. Eight thought the currency would decline while two picked it to trade higher and one said it would remain relatively unchanged. The kiwi recently traded at 78.21 US cents.

Oil prices have accelerated their slide after last week's decision by the Organisation of Petroleum Exporting Countries to keep their production targets unchanged rather than pull back supply to bolster prices, as part of a strategy to shut out higher cost alternatives. The slump in oil is a concern for central banks trying to prevent deflation, particularly in the Eurozone where the European Central Bank will be mulling further stimulus measures when it meets this week.

"We are kicking off the week in a big downtick," said OMF senior dealer foreign exchange, Stuart Ive. "Commodity currencies continue to be under pressure as OPEC last week announced that they will not cut their ceiling of 30 million barrels, and this has all led to a stronger US dollar."

The US dollar has advanced for a fifth consecutive month as economic data points to consistent improvement. The greenback could be given a further boost this week should the key US non-farm payrolls report scheduled for release on Friday show more jobs continued to be added last month. US employers added 228,000 more workers in November, ahead of a 214,000 gain in October, according to a Bloomberg News survey.

That contrasts with weakening economies in much of the rest of the world. Central banks are meeting this week in Europe, the UK, Canada, Australia, Brazil and Mexico.

"They are all going to be beating the same drum and that is deflation is a concern, or the lack of inflation," said OMF's Ive.

Last week, Bank of England governor Mark Carney said UK inflation is "more likely than not" to fall below 1 percent in the coming months, which means he would write a letter of explanation to chancellor George Osborne. Annual inflation was below the BoE’s 2 percent target at 1.3 percent in October and is expected to cool further in the months ahead.

Traders will be looking to see whether ECB president Mario Draghi outlines plans for further stimulus as he weighs the drop in oil following a report last week showing Eurozone inflation slowed to 0.3 percent in November, matching a five-year low and short of the bank's 2 percent target.

The BoE and ECB meet Thursday, while the Australian central bank meets tomorrow.

New Zealand Reserve Bank governor Graeme Wheeler, in a speech on inflation targeting this morning, said New Zealand's exchange rate remains "unjustified and unsustainable" at current levels.

The local currency may be put under further pressure this week should Fonterra Cooperative Group's GlobalDairyTrade auction on Wednesday show continued weakness, which would bolster expectations the dairy processor will lower the forecast price it expects to pay farmers, following its meeting on Dec. 9.

This afternoon, traders will be eyeing the final readings of manufacturing data from China, to see if they weakened from initial estimates. China is New Zealand's largest trading partner and the world's second-largest economy.

In New Zealand, monthly commodity price data is scheduled for release tomorrow, while third-quarter building data is due Wednesday.

In Australia this week, third quarter GDP data is out Wednesday, with other reports on retail sales, trade, construction, services, building approvals, commodity prices, inventories, manufacturing, profits and housing prices also scheduled for release this week.

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