NZ dollar outlook Kiwi soft as RBNZ holds off, Fed tapers, amid emerging market woes

The New Zealand dollar may decline this week on the expectation the Reserve Bank could disappoint some investors by holding off on interest rate rises as the greenback is bolstered by US Federal Reserve tapering and concerns linger about emerging markets.

The local currency may trade between 80.80 US cents and 84.20 cents this week, according to a BusinessDesk survey of six traders and strategists. Four predict the kiwi will fall this week, while two expect it to remain largely unchanged. It recently traded at 82.12 US cents from 82.32 cents at 8am.

Investors are shunning riskier assets such as the higher yielding New Zealand dollar on concern about the outlook for emerging markets. This week, all eyes will be on the Fed, which may continue to taper its US$75 billion a month bond-buying programme, increasing the lure of the greenback, while in New Zealand the central bank may hold off on hiking rates until its next meeting in March.

"It's an interesting week because we have got things going on domestically and offshore," said Kymberly Martin, markets strategist at Bank of New Zealand.

"When you put all of that together, the slightly stronger US dollar, maybe risk appetite still not being particularly buoyant and the RBNZ not delivering a rate hike, all those things should mean a slightly softer New Zealand dollar."

The Federal Open Market Committee will start its two-day meeting in the US on Tuesday, the last gathering before Janet Yellen succeeds Ben Bernanke as Fed chairman, and is expected to announce another US$10 billion cut to its monthly bond-buying programme, eased to U$75 billion this month.

A reduction in the programme supports the greenback because it would reduce the amount of US dollars in circulation, boosting its value. The announcement is expected at 8am New Zealand time on Thursday.

An hour later at 9am, New Zealand's central bank releases decisions from its six weekly review of interest rates. The bank is expected to keep its benchmark rate at 2.5 percent according to economists polled by Reuters, while traders are pricing in a 48 percent chance of a hike, according to the Overnight Swap Curve.

"If they don't deliver that, at least in the short term, that could see a bit of a knee-jerk, pull-back in the currency," said the BNZ's Martin.

Most economists expect New Zealand's Reserve Bank to start hiking rates in March, according to Reuters. The central bank is more likely to increase interest rates for the first time in three years following its full reassessment of the economic outlook in March, Robin Clements, UBS senior economist, said in a note.

Other reports scheduled for release in New Zealand this week include building consents and tourist arrival data on Thursday and trade data and on Friday.

New Zealand's Reserve Bank publishes its monthly data on its foreign exchange position on Thursday and on mortgage lending to households on Friday.

Governor Graeme Wheeler is scheduled to speak at the Canterbury Employers' Chamber of Commerce in Christchurch on Friday, where he will review the New Zealand economy, with special emphasis on the construction sector.

Elsewhere, traders will be eyeing fourth quarter growth data scheduled for release in the UK tomorrow and in the US on Thursday. Germany and Australia also publish business confidence surveys this week.

(BusinessDesk)