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The New Zealand dollar may test a post-float record this week with second-quarter inflation figures likely to underline the Reserve Bank's path to higher interest rates, though the currency may struggle to hold those gains.
The kiwi may trade between 87 US cents and 89 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Four expect the currency will fall this week, three predict it will gain, and three have a neutral bias. The kiwi recently traded at 88.14 US cents.
New Zealand's consumer prices rose 0.4 percent in the three months ended June 30, with the annual pace of inflation accelerating to 1.8 percent from 1.5 percent the previous quarter, according to a Reuters survey. That's just ahead of the Reserve Bank's CPI forecast, and would reinforce expectations governor Graeme Wheeler will hike the official cash rate a fourth time to 3.5 percent later this month. Traders have priced in an 88 percent chance of a rate hike at the July 24 meeting, according to the Overnight Index Swap curve.
"The question is whether he's going to pause for one meeting or two - the data has been a bit negative compared to the Reserve Bank's forecasts, so it's more of a likelihood for two meetings," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "Given the kiwi's getting to heady heights, but we're not going to run away too much from here."
Local data showed the volume of New Zealand house sales fell last month, with central bank imposed mortgage lending restrictions continuing to curb demand for cheaper properties. Separately, a bank survey showed the country's service sector activity expanded in June, rounding out a buoyant second quarter.
Traders will also be watching testimony by Federal Reserve chair Janet Yellen to Congress and Senate committees, to gauge her view on the strength of the US economy, after minutes to the Fed's June meeting showed the central bank's policy makers plan to end their quantitative easing programme after October. Investors will keep tabs on three speeches by other Fed speakers through the week.
Westpac's Speizer said US data has continued to be disappoint traders, and that will support the kiwi dollar.
Traders will also be watching the results of the latest Fonterra Cooperative Group dairy auction on Tuesday in the US. Dairy prices fell to an 18-month low at the previous GlobalDairyTrade auction, and the decline has prompted ANZ New Zealand economists to downgrade their forecast for the 2015 payout to farmers, which they say would reduce dairy incomes by $3 billion in the season.
Fears about the vulnerability of Portugal's Bank Espirito Santos eased on Friday, and traders will continue to monitor the strength of the European banking system. The kiwi recently traded at 64.80 euro cents.
The Bank of Japan is expected to keep interest rates near zero and maintain the size of its quantitative easing programme when it reviews monetary policy tomorrow. The local currency was recently at 87.37 yen.