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NZ Dollar Outlook Kiwi may decline as stronger US economic data points to pull back in stimulus

The New Zealand dollar may decline this week as stronger US economic data suggests the Federal Reserve may start pulling back on its US$85 billion a month bond buying programme as early as next month.

The local currency may trade between 80 US cents and 83.90 cents this week, according to a BusinessDesk survey of eight traders and strategists. Four expect the currency to decline, three expect it to remain unchanged while one says it may gain. The kiwi recently traded at 81.81 US cents from 81.83 cents at 8am in Wellington.

Traders will be eyeing a bunch of second tier economic releases in the US this week for signs a revival in the world's largest economy may prompt the Fed to taper its monetary stimulus programme at its Dec. 17-18 meeting. A reduction in the programme supports the greenback because it would reduce the amount of US dollars in circulation, boosting its value.

"We are going to be more focused again on developments in the US economy," said Dan Bell, head of corporate sales at HiFX in Auckland.

"As we get closer to the next Federal Reserve announcement, stronger-than-expected US data will give markets more reason to believe that they will start to remove some of the stimulus in December rather than next year," Bell said. "That is really the key driver in terms of the global currency markets at the moment."

In the US this week, there are a slew of reports due ahead of the Thanksgiving holiday on Thursday. On Monday, reports are due on existing home sales and Dallas area manufacturing, while Tuesday sees building permits, the Case-Shiller home price index, Richmond Fed manufacturing and consumer confidence and on Wednesday reports are scheduled on Chicago Fed activity and durable goods orders.

"Overall there is enough data out of the US to get a decent view of how their economy is performing," said HiFX's Bell. "Stronger than expected news out of the US will see the kiwi go lower. I think we will see the kiwi struggle overall."

The New Zealand dollar is looking vulnerable and may dip below 80 cents over the next couple of weeks, Bell said.

Improving US employment data has stimulated demand for the US dollar, and the next major focus is the release of the key non-farm payrolls report on Dec. 6.

"You are seeing a gradual ongoing improvement in US economic data which should certainly give the Fed more confidence that the economy is improving and they can start tapering the stimulus," Bell said.

In New Zealand this week, October overseas trade data scheduled for release on Wednesday is expected to provide further evidence of the post-drought rebound in dairy production while an ANZ business confidence survey on Thursday should show continued optimism, Robin Clements, an economist at UBS New Zealand, said in a note.

On Friday, any weakness in building consent or household claim figures for October will likely be interpreted as signs that Reserve Bank restrictions on high-debt lending are working, Clements said.

In Australia, Reserve Bank of Australia deputy governor Philip Lowe is scheduled to speak in Sydney tomorrow morning on productivity and infrastructure.

Traders will be eyeing Thursday's report on Australian third-quarter capital spending for an indication on how the mining sector is tracking. Capex spending has slowed over the past year as mining investment waned.

The kiwi touched a five-year high against the Aussie on Friday as slowing growth in Australia contrasts with a reviving New Zealand economy.

"That divergence in monetary policy expectations continues to be a key driver for the kiwi Aussie cross rate," said HiFX's Bell. "Whilst the market is still pricing in a small chance of further rate cuts from the RBA next year we are well and truly pricing in reasonably aggressive rate hikes from the RBNZ next year so that divergence will continue to be a key driver."

Elsewhere, reports on inflation are due for release in Europe and Japan on Friday, as well as the European unemployment rate. European inflation data will be closely watched after unexpected weakness last month led to a rate cut by the European Central Bank.


Comments and questions

This is to be kept an eye on folks.