NZ dollar outlook: Kiwi may fall in week of central bank event risk

The New Zealand dollar may fall this week, while staying in its recent trading range, as traders await a plethora of central bank meetings against a background of stalled US fiscal cliff talks.

The kiwi recently traded at 81.99 US cents, close to the centre of its trading range since mid-September, while it has gradually appreciated on a trade-weighted basis, with the TWI recently at 73.37.

It will remain in a range of about 81 US cents to 83.10 cents this week, according to a BusinessDesk survey of seven strategists and traders. Three of those polled see it ending the week lower, two higher and two see it range-bound.

Five central banks are scheduled to meet this week, with the most important for the kiwi likely to be the Reserve Bank of Australia tomorrow and the New Zealand central bank on Thursday.

The RBA is forecast to cut its cash rate a quarter points to 3%, ahead of third-quarter economic growth figures on Wednesday, while the RBNZ is expected to keep the official cash rate unchanged at a record low 2.5%.

"There's no obvious directional clue for the week ahead," says Imre Speizer, senior markets strategist at Westpac Banking Corp. "There's a plethora of event risk both globally and locally. Probably the negatives will outweigh the positives, led by the fiscal cliff."

US House of Representatives Speaker and senior Republican John Boehner told Fox News at the weekend that talks on averting the fiscal cliff – $US607 billion of spending cuts and tax hikes that kick in on January 1 – are "nowhere".

Trading blame

Republicans and the White House have been trading blame over the lack of progress in heading off an event that could push the US into recession.

"Politicians are really deciding the direction of markets at the moment," says Derek Rankin, director at Rankin Treasury Advisory. "The ability of economics to move markets is much more subdued."

Traders will also be watching the ANZ Commodity Price Index release tomorrow and the latest GlobalDairyTrade auction, whose results will be published on Wednesday.

US payrolls round out the week. The US economy added 90,000 jobs last month, the smallest gain since June, according to a Bloomberg survey. Jobs growth is expected to have been hampered by disruptions from Hurricane Sandy.

Traders are pricing in an 80% chance of an RBA rate cut tomorrow, even after capital spending figures show investment in the resources sector is not drying up as expected. The rate cut will narrow the gap with New Zealand interest rates, though traders say some of that is already priced into the cross rate.

The kiwi recently traded at 78.52 Australian cents, having climbed to as high as 80.81 cents in early October.

Australian gross domestic product for the third quarter, out Wednesday, is expected to show the economy maintained its pace at 0.6%, while figures today may show growth in retail sales slowed to 0.4% in October, according to a Reuters survey.

Clearly weakening

"The fundamentals in Australia are clearly weakening," says Mike Jones, strategist at Bank of New Zealand.

He has a positive bias for the kiwi this week on the basis that the RBNZ will not be as dovish as some in the market are expecting. He noted that implied volatility for the New Zealand dollar is at 15-year lows and the kiwi has been trading in its tightest range for two years though event risk this week could see it test that range.

"If it's going to happen it's going to happen this week," he says.

The kiwi is close to an eight-month high against the yen, trading recently at 67.51 yen, with the possibility of further gains this month, Mr Rankin says.

Japanese elections on December 16 are expected to hand victory to the opposition LDP party, which has vowed to weaken the yen, even if it means interest rates go negative. If that happens, "the carry trade will go through the roof and exporters to Japan will be under enormous pressure", he says.

Alex Sinton, senior dealer at ANZ New Zealand, expects RBNZ governor Graeme Wheeler to cite the impact of a high New Zealand dollar in his assessment in the MPS even though "there's little they can do about it".

One thing in the kiwi's favour was a historical seasonality for the currency, which typically appreciates in mid-December. Still, he would be surprised if the currency does not finish the week "a little bit lower".

(BusinessDesk)