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NZ Dollar Outlook: Kiwi range-bound ahead of OCR review; Australian inflation

Tuesday 26th October 2010

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The New Zealand dollar will likely trade in familiar ranges this week ahead of Australian inflation data tomorrow and the official cash rate review on Thursday, which will likely cement expectations of a widening gap between trans-Tasman interest rates.  

All nine economists and strategists in a BusinessDesk survey expect the kiwi dollar will trade in a range of 74 US cents and 76.50 cents this week, though four pick it to test the top of the band while one predicts it will look at the bottom. Economists predict Reserve Bank of New Zealand Governor Alan Bollard will hold the benchmark interest rate at 3% in Thursday’s review, while more strong Australian data has traders betting Australia’s central bank will keep hiking rates next week if tomorrow’s consumer price index shows inflation is accelerating too quickly.

“CPI in Australia has a bearing on the kiwi, which seems to be taking a positive feed from the Australian dollar,” said Chris Weston, institutional trader at IG Markets in Melbourne. The kiwi “doesn’t have tightening bias the Aussie does” with the two central banks at different cycles in monetary policy, he said.

The kiwi hit a six-month low against its trans-Tasman counterpart of 75.56 Australian cents after third-quarter producer prices index data lifted expectations the RBA will hike rates next week, while RBA Governor Glenn Stevens added fuel to upbeat sentiment saying exchange rates weren’t a “panacea” to the world’s unbalanced growth. The kiwi rose to 75.89 Australian cents from 75.76 cents yesterday.

Traders are betting the RBA will hike the target cash rate 56 basis points over the coming year, according to the Overnight Index Swap curve, while pricing in a 0.52 percentage point increase for the RBNZ.

Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia, said a slew of American data this week will be “pivotal” ahead of next week’s Federal Open Market Committee meeting. Third-quarter U.S. gross domestic product, personal consumption, private consumption data and the University of Michigan confidence survey are due on Friday.

“A lot of the US data in the last six weeks has surprised on the upside” and members on the Fed committee are weighing their options on whether to print more money, he said. He predicts the kiwi will trade between 74 US cents and 76.50 cents this week.

A G-20 meeting of finance ministers in Seoul failed to meet a meaningful accord to damp the so-called ‘currency wars’, with treasurers agreeing to shun competitive currency devaluations, but stopping short of setting targets to reduce trade imbalances.

That reignited US dollar selling ahead of next week’s FOMC meeting, which is expected to unveil the Fed’s second round of asset purchases. Goldman Sachs is picking the central bank will print up to US$2 trillion in the quantitative easing programme. The kiwi fell to 75.14 U.S. cents from 75.47 cents yesterday.

Robin Clements, economist at UBS NZ, said most people are expecting the Fed to do something, though the market is still uncertain as to its size and timing.

“Our guys think they will disappoint and won’t meet the market, which means more US dollar weakness,” he said. He expects the kiwi to trade near the top of its range as the greenback faces more weakness.

Tomorrow’s National Bank Business Outlook is expected to hold near last month’s 15-month low, which may be the nadir of companies’ pessimism. Earlier this month, the New Zealand Institute of Economic Research’s quarterly survey of business opinion flagged a heightened risk of a double-dip recession.

“We’ve got the National Bank business survey which should be interesting to see if we are past the point of maximum pessimism,” said Darren Gibbs, chief economist at Deutsche Bank NZ. Gibbs predicts the kiwi will trade between 74.25 U.S. cents and 76 cents this week.

All nine strategists surveyed expect the kiwi will stay range-bound on a trade-weighted basis this week, though three see more downside against the Australian dollar.

The kiwi was little changed at 66.56 on the TWI from 66.57 yesterday, and fell to 60.73 yen from 60.91 yen. It gained to 53.85 euro cents from 53.63 cents yesterday, and was little changed at 47.81 pence from 57.88 pence.

On the data radar this week is local building and trade data on Friday, while Finance Minister Bill English appears before Parliament’s Finance and Expenditure Committee tomorrow. German inflation and employment data comes out on Thursday, while UK GDP comes out on Tuesday in Britain. The Bank of Japan will announce its target rate on Friday.



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