NZ dollar outlook: Kiwi may fall if data disappoints traders

The RBA's review of interest rates tomorrow in New Zealand's biggest export market is a major focus for the kiwi this week.

(BusinessDesk) The New Zealand dollar may fall this week with the risk that traders betting on further gains are disappointed if there are new signs of global economic weakness or the Reserve Bank of Australia fails to cut interest rates tomorrow.

The kiwi last traded at 82.78 US cents, down from 82.97 cents in late New York trading on Friday. It will trade in a range of 81.80 US cents to 83.50 cents this week, based on a BusinessDesk survey of six analysts. Four of the six say the currency may weaken.

The RBA's review of interest rates in New Zealand's biggest export market tomorrow is seen as a major focus for the kiwi this week.

The kiwi is trading near 80 Australian cents, a level it has not broken through since September last year, as traders bet the RBA will cut rates a quarter point to 3.25% and follow up with further cuts.

Weaker demand from China has weighed on prices for Australia's raw materials such as coal and iron ore. If the RBA fails to act the kiwi could tumble.

"The kiwi-oz trade is fairly crowded. A lot of people have got on board," says Alex Sinton, senior dealer at ANZ New Zealand. "A move above 80 [Australian cents] would cause some consternation." As the kiwi has gained, "people have been scaling back their expectations".

Surveys show has a 60% chance of a rate cut in the RBA monetary policy review.

Meanwhile, China releases its official manufacturing PMI later today. That comes after the Chinese HSBC manufacturing PMI on Friday printed at 47.9, signalling a contraction. Market consensus is for today's data to show a return to growth at 50.1, though ANZ Bank is picking it remains in contraction.

That would add to recent evidence the Chinese economy is weakening, which bodes poorly for Australia and New Zealand, which count the Asian nation as first- and second-largest export market, respectively.

"The kiwi is going to step lower with the Australian dollar and that's a function of the China slowdown," says Derek Rankin, director at Rankin Treasury Advisory.

Both currencies have benefitted from money flows "scared out" of Europe looking for a relative haven and with the local currencies having extra polish from relatively high interest rates for Aaa-rated nations.

He says the kiwi will extend its gains against the Australian dollar, partly as a function of the relatively stronger demand for New Zealand's exports.

"We sell food, they sell rocks. At the moment, food is outperforming rocks. The time for exporters having an easy run into Australia are over."

Mike Jones, currency strategist at Bank of New Zealand, says an Australian rate cut is a wider concern because of what it means the RBA is thinking about the state of the Australian economy.

"There's an awful lot of good news priced into the kiwi at the moment," he says. This week "could see risk positions pared back".

Keeping a lid on trading activity is Golden Week in China, which will see many take a holiday this week.

Spain will again be at the forefront of investors' minds in coming days amid hopes the country will decide to seek financial help, though a formal request to its European Union partners might not happen until later this month.

Also on the agenda, along with the RBA, are minutes from the latest meeting of the US Federal Reserve, word from policymakers at the European Central Bank, who meet on Thursday, and meetings by the Bank of England and the Bank of Japan.

"This could be a deadly dull week because everything is as expected. Or it could be volatile because nothing comes out as expected," says Peter Cavanaugh, senior client adviser at Bancorp.

The kiwi at around 83 US cents is "looking a bit tired and the bias for the week is lower".

There is little in the way of New Zealand economic data scheduled for this week, though the ANZ Commodity Price Index due for release tomorrow and results of the latest GlobalDairyTrade auction due out on Wednesday will give an update on the prices New Zealand is getting for its overseas shipments.

The week rounds out with the September US employment report. Non-farm payrolls are forecast to have risen by 115,000, while the US unemployment rate is forecast to have edged up 0.1% to 8.2%, according to Reuters.

Wednesday sees the first of three presidential debates between US President Barack Obama and Republican candidate Mitt Romney. Mr Obama is managing to hold a slight advantage in the polls despite the economy's lingering weakness.