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NZ Dollar Outlook Kiwi may fall as CPI looms, eyes on China

Monday 15th October 2012

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The New Zealand may fall this week with inflation figures expected to confirm there is little pressure on the Reserve Bank to raise interest rates and signs growth in the world's second largest economy, China, is slowing.

The New Zealand dollar recently traded at 81.49 US cents, down from 81.88 cents at 8am in Wellington. That's at the bottom end of this week's predicted trading range of 81.20 cents to 83.50 cents.

Four out of the five analysts surveyed say the kiwi will finish the week lower, one higher. Inflation probably quickened in the third quarter, led by a seasonal pickup in food prices and local authority rates in what will be the final period for the consumer price index to hold at historically low annual levels.

The consumer price index rose to 0.6 percent in the three months ended Sept. 30, double the second-quarter rate, according to a Reuters survey of eight economists. The annual rate rose to 1.1 percent from 1 percent. "CPI will be the first key event this week," said Jane Turner, economist at ASB Institutional.

"There is a possibility it could come in weaker, giving a bit of a downside bias to the kiwi." Annual inflation is at the bottom of the Reserve Bank's 1 percent-to-3 percent annual target but that's likely to change by the final three months of 2012, with the bank predicting annual inflation to pick up to 1.9 percent.

The Bank of New Zealand-Business NZ performance of services index released this morning, contracted 0.4 points to 49.6 for the first time since July 2010 last month. The latest survey points to a slowing of economic growth in the second half of the year, new orders and sales led the decline.

Fonterra's GlobalDairyTrade Auction is on Wednesday morning. At the last fortnightly auction prices fell 0.9 percent to an average winning price of US$3,285 per metric tonne, led by declines in high-value rennet casein, cheddar and anhydrous milk fat. International travel and migration for September will be released by Statistics New Zealand on Friday.

Investors will be looking to China's gross domestic product and industrial production numbers due for release on Thursday. China's economy probably grew 7.4 percent last quarter, according to a Bloomberg survey, the slowest pace in three years.

"It's this week's Chinese data that will likely prove more important for the New Zealand dollar, in our view," said Mike Jones, market strategist at Bank of New Zealand. "Chinese data over the past month or so has failed to show any response to recent policy stimulus.

Investors are hopeful this week's September data will provide some evidence of a bottoming in activity." Upbeat Chinese trade figures on Sunday helped push up risk-sensitive assets, such as the kiwi dollar.

Overseas shipments to China, New Zealand's second largest export market, increased 9.9 percent compared to a year earlier, according to official figures. That's more than the 5.5 percent predicted in a Bloomberg survey. Imports increased 2.7 percent, creating a US$27.7 billion trade surplus.

The Reserve Bank of Australia will release the minutes from its October meeting on Tuesday. Last week, the central bank cut interest rates 25 basis points to 3.25 percent, citing weaker commodity prices in the a global market where the outlook for the economic growth "has softened."

"It will provide more insight into further rate cuts," ASB's Turner said. "The possibility of a rate cut could add further headwind to the NZD/US cross and a bit of downside to the kiwi against the Aussie dollar."

The kiwi recently traded at 79.65 Australian cents from 79.66 cents. In the US, the world's largest economy, earnings season will continue to set the tone for equities, with McDonald's, Microsoft, IBM, Intel and Johnson & Johnson all reporting this week.

Reuters' data showed 11 negative outlooks for fourth-quarter results so far from Standard & Poor's 500 companies, while none are positive. US data out this week includes retail sales, the consumer price index, industrial production, housing starts, and existing home sales.

That comes after data last week showed jobless claims in the world's largest economy dropped to the lowest level since 2008, while confidence among consumers rose in October to the highest in five years.

In Europe, all eyes are on the two-day European Union Summit kicking off on Thursday. Investors are hopeful Spain will apply for official aid before then. Greece is also creeping back into the headlines after the International Monetary Fund said it should get more time to meet fiscal targets for its regional lifeline and cut its growth forecasts.

"The bottom line is they need to implement something - it could be another talk fest," said Alex Sinton, senior dealer at ANZ New Zealand. "The kiwi should remain supported and remain higher on the European problem." The New Zealand dollar was little changed on 62.93 euro cents from 63.09 cents at 8am.

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