NZ dollar outlook: Kiwi fall likely on Spain fears

BUSINESSDESK: The New Zealand dollar may fall this week amid concern a 100 billion euro bailout for Spain won’t be enough to prevent the nation heading the same way as Greece, while locally the Reserve Bank is expected to keep interest rates at a record low.

The kiwi recently traded at 79.68 US cents, little changed from 79.70 cents at 8am. That is right in the middle of this week's predicted trading range of 78 cents to 80.80 cents, according to a BusinessDesk survey of five analysts.

Four out of the five predict the kiwi will finish the week lower, with one tipping it will stay unchanged.

Eurozone finance ministers met by conference call on Friday to finally approve a 100 billion euro bailout for Spain.

The move did little to ease concern about Europe’s woes, with Spanish Prime Minister Mariano Rajoy forecasting a second year of recession and Valencia becoming the first region to seek a rescue from the nation's central government.

"It's just a confirmation of the fiscal, financial and economic mess that some of Europe is in," said Peter Cavanaugh, senior client adviser at Bancorp. "The good news is that at least Spain thinks they are doing something about it, but they are travelling the same path as Greece."

Officials from the European Central Bank, the International Monetary Fund and the European Commission will return to Greece this week to decide whether to release more funds from a 130 billion euro rescue package.

"I think they want evidence that their hope is well founded – that Greece can go down the path of the improvements that it's promised and that it is willing to,” Mr Cavanaugh said.

Data out of Europe this week includes the euro-zone's performance of manufacturing index on Wednesday which may show the manufacturing sector remaining in contraction.

New Zealand's Reserve Bank is unlikely to signal any change from its assessment of monetary conditions when it reviews interest rates on Thursday. It will keep the official cash rate at 2.5%, according to all 15 economists in a Reuters survey.

"It does look like a fairly boring affair," said Mike Jones, market strategist at Bank of New Zealand. "There is the potential for surprise but they will tow a fairly similar line to June."

"I think they will signal to keep rates low for the foreseeable future," he said.

Since the June monetary policy statement, figures have showed annual inflation eased to the bottom of the central bank’s 1% to 3% target range in the second quarter, while the trade-weighted index is higher than expectations and with Valencia the latest place to seek financial aid, there is little sign of improvement in the eurozone.

The kiwi was little changed on 76.92 Australian cents from 76.89 cents as New Zealand's largest export market prepares to release its inflation figures on Wednesday. Consumer prices probably rose 1.3% in the June quarter, according to Bloomberg, the slowest annual pace since June 1999.

New Zealand's CPI rose 0.3% in the June quarter, slower than the 0.5% pace forecast by a Reuters survey of economists. The annual pace was the slowest since December 1999.

In the US, the earnings season will continue to set the tone for equities with Apple, Facebook and Amazon all reporting this week. Out of 116 companies that have reported so far, only 43% have exceeded revenue expectations, Reuters said.

UK gross domestic product will be released on Wednesday and is expected to show a contraction for the third consecutive quarter. That is followed by US GDP on Friday, where growth is expected to have slowed to a 1.4%  annualised pace in the second quarter.

New Zealand's international visitor arrivals are released tomorrow, followed by overseas merchandise trade for June on Wednesday from Statistics NZ.

The government financial statements for the year ended June 2011 are out on Friday.