The New Zealand dollar may have reached its highs for the year and will probably decline this week amid speculation the Reserve Bank will signal Thursday's hike in interest rates will be the last for this year.
The kiwi may trade between 85 US cents and 88.50 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Five predict the kiwi will fall this week, while four expect it to gain and one says it will likely remain largely unchanged. It recently traded at 87 US cents.
Falling commodity prices, particularly for dairy and logs, combined with softer inflation, may prompt Reserve Bank governor Graeme Wheeler to take his foot off the brake after he hikes the official cash rate for a fourth time to 3.5 percent this Thursday. That will likely dent demand for the local currency, which has surged this year to hover just below its post-float high of 88.40 US cents, driven by overseas investor demand for yield.
"In the lead up to the OCR this week, there is still some reluctance for kiwi to go lower," given some investors are concerned the statement will be stronger than expected, said Bank of New Zealand currency strategist Raiko Shareef.
But with the currency stronger than the central bank wants, weaker commodity prices and tepid inflation "our expectation is that they will strongly signal that everything from here on out, after this hike in July, will be very, very data dependent and for us the risk is that December might not be a hike after all," he said.
The kiwi has probably seen its highs for this year as the focus turns to a recovery in the US economy, he said.
"There are fewer reasons to push kiwi higher, there are fewer reasons for it to test the 88.40 level again so I would be quite surprised if we get back up there," Shareef said. While there is a risk the Reserve Bank could keep interest rates on hold this week, it is more likely to finish off the current hiking cycle which is priced in by the market, and signal it will pause to assess how the economy is digesting those hikes, he said.
This week's OCR review involves a one-page statement, in contrast with a full Monetary Policy Statement which includes updated forecasts, a detailed assessment and a press conference where the governor has more opportunity to explain a change in stance.
The Reserve Bank will likely resume its hiking cycle next year to bring the benchmark back to a more neutral level, he said.
Market watchers are divided over whether the Reserve Bank is likely to intervene to push the kiwi lower.
Westpac Banking Corp says the central bank may consider selling the kiwi following the OCR this week, after Wheeler signalled in May that it may intervene should the currency remain high in the face of worsening fundamentals, such as weak export prices.
However BNZ thinks this unlikely as the move would push tradables inflation higher, which is not consistent with monetary policy to lower inflation.
A speech by Reserve Bank deputy governor Grant Spencer on prudential regulation tomorrow isn't expected to be market moving, given the OCR is a matter of days away.
New Zealand's latest trade balance data for June is scheduled for publication on Thursday. Lower commodity prices are likely to start showing through in the data in the next few months, and the June quarter will probably show a seasonally adjusted surplus of $150 million, well below the $900 million first quarter surplus, ANZ Bank New Zealand said in a note.
ANZ Bank's latest business confidence survey for July due out Friday will provide a barometer of the state of the business sector after last month's decline.
Reserve Bank of Australia governor Glenn Stevens, scheduled to speak to the Anika Foundation in Sydney tomorrow, will likely reiterate the bank is comfortably on hold with a mild easing bias.
Australia publishes its latest second quarter inflation data on Wednesday.
Inflation is also the key focus in the US this week, scheduled for release tomorrow.
Meantime in the UK, traders will be eyeing Wednesday's release of the Bank of England minutes from its June meeting.
In China this week, the HSBC flash manufacturing PMI on Thursday is expected to show a modest gain to 51 from 50.7. A reading above 50 indicates expansion.
Traders will also be watching geopolitical tensions in Gaza and developments in the Malaysia Airlines tragedy.