NZ Dollar Outlook: Traders split on outlook for kiwi

Views are split on the direction of the New Zealand dollar this week, reflecting positioning in the currency leading up to the Reserve Bank's review of interest rates on Thursday and the US Federal Reserve's meeting next week.

The local currency could trade between 65USc and 69.25c this week, according to nine analysts in a BusinessDesk survey. Five expect the kiwi to gain while four bet it will drop. None are on the fence. It recently traded at 67.15USc.

Traders have pulled back their bets for the US dollar's advance as upbeat employment data at the end of last week cemented expectations the Fed will likely hike interest rates following its December 15-16 meeting, with attention now turning to a more gradual rate of increases next year than previously anticipated.

In New Zealand, most economists expect Reserve Bank governor Graeme Wheeler to cut the benchmark interest rate this week, but traders betting on the outcome have given it only about a 50% probability.

"The US dollar broke lower last week, which pushed the kiwi higher," says Westpac Banking Corp New Zealand senior market strategist Imre Speizer.

"The US dollar is now much weaker than where we would have expected it to be. The next few weeks are looking quite bullish, primarily on the weaker US dollar."

The greenback would normally gain leading into an expected US interest rate hike, however traders have already priced in the move, with the US dollar index having gained 9% so far this year.

In New Zealand, the kiwi could advance even if the central bank cuts rates should the bank signal there are no further cuts in the pipeline.

"There are two big events before year end. There is our meeting and the Fed’s meeting, and both of those are almost a guess as to what the currency does for each," said Westpac's Mr Speizer.

"The Fed is almost certain to hike, but the question is what will the market do to the US dollar on that?"

In Westpac's weekly note titled Walking a Tightrope, it says New Zealand's central bank will likely "carefully tread the fine line between keeping its options open by not removing the possibility of further rate cuts, and at the same time not explicitly signalling that further cuts are likely."

The Reserve Bank decision is scheduled for release at 9am on Thursday. Governor Wheeler will front a press conference after the decision is announced, and appear before Parliament's finance and expenditure select committee at 1pm.

Also on Thursday, the Real Estate Institute is due to release its monthly house sales data, Fonterra may provide an update on its expectations for its 2015/16 forecast payout to farmers, and electronic card spending data for November is scheduled for release.

On Tuesday, third-quarter manufacturing data is due out, while on Friday the BNZ-Business performance of manufacturing index, ANZ-Roy Morgan consumer confidence survey, and November food price data are scheduled for release.

In Australia this week, reports are due on business and consumer confidence, as well as November jobs data.

In China, data is due on November trade, inflation, producer prices, retail sales, industrial production and fixed asset investment.

Elsewhere, the Bank of England is expected to keep its policy unchanged at its meeting on Thursday.

In the US, St Louis Fed president James Bullard will speak on the economic outlook today. The US has data this week on consumer credit, small business optimism, wholesale trade, jobless claims, import and export prices, producer prices, retail sales, business inventories and consumer confidence.

In Europe, reports are due on investor confidence, third-quarter GDP, as well as German industrial production, trade and inflation.