NZ dollar outlook: Kiwi may slide as Reserve Bank cut weighs, Fed risk looms

The New Zealand dollar may decline this week after the Reserve Bank's interest rate cut last week and amid speculation the Federal Reserve could put rates up again.

The kiwi may trade between 65USc and 69USc this week, according to 12 currency advisers surveyed by BusinessDesk. Six expect it to decline, one bets it will gain, and five say it will remain largely unchanged. It recently traded at 67.24USc.

The local currency took a step down last week after Reserve Bank governor Graeme Wheeler cut the benchmark interest rate, surprising many who hadn't expected the rate to fall until later in the year. This week, all eyes are on Federal Reserve policy makers who are gathering for their much-anticipated two-day meeting in the US where a recent string of better-than-expected economic data has made investors realise multiple US rate hikes might be on the menu this year after all.

The kiwi is likely to be hurt by some "carry over" from the cut to the official cash rate last week, said Peter Cavanaugh, client adviser at Bancorp Treasury Services. Mr Cavanaugh said he was also "wary that we could see a resurgent US dollar should the Fed buck markets opinion and stick to its guns on interest rate rises, and there is the risk that they might actually act now because some of the data they look at has actually been quite strong."

The Federal Open Market Committee ends its two-day meeting in Washington on Wednesday and is expected to keep the benchmark interest rate unchanged as it assesses how recent turbulence in global financial markets has affected its forecasts for unemployment and inflation. Investors will scrutinise its statement and economic projections, as well as comments during a press conference by Fed chairwoman Janet Yellen.

"Market pricing implies a risk of a Fed interest rate this year is close to bugger all – that's why there is the greater risk of a shock," said Bancorp's Mr Cavanaugh. "Raising it this week would be a real shock but I'm leaning toward picking the Fed to remind the market that it's on track, and possibility coming up with language pinpointing it down to June."

In New Zealand, Reserve Bank governor Graeme Wheeler is scheduled to give an off-the-record speech to a breakfast function hosted by the Institute of Directors in Auckland tomorrow.

Also on the agenda tomorrow, the Reserve Bank of Australia publishes the minutes to its last meeting and the Bank of Japan reviews policy. On Thursday, the Bank of England also reviews its interest rate.

Other data releases in New Zealand this week will probably take a back seat because they have been superseded by recent events, said Bancorp's Mr Cavanaugh. They include fourth quarter current account data on Wednesday and gross domestic product data on Thursday, consumer confidence measures on Tuesday and Friday and the fortnightly GlobalDairyTrade auction early on Wednesday morning.

Australia also releases employment data on Thursday which has been volatile of late and could impact the currency if it disappoints, Mr Cavanaugh said.

(BusinessDesk)