NZ Dollar Outlook Kiwi in for a volatile ride as slew of data collides with Fed ahead of holidays

Monday 16th December 2013

The New Zealand dollar may have a volatile ride this week with a slew of pre-Christmas announcements including what could be the start to tapering by the Federal Reserve on Thursday and reports on the nation's economic growth.

The local currency may trade between 80.50 US cents and 84.50 cents this week, according to a BusinessDesk survey of 10 traders and strategists. One expects the currency to remain unchanged while six say it may gain and three expect a drop. The kiwi recently traded at 82.67 US cents from 82.56 cents at 8am in Wellington.

New Zealand data out this week is expected to show positive growth in the economy, strengthening the case for interest rate rises next year which is underpinning a strong kiwi. Meanwhile in the US, traders are awaiting confirmation from the Fed that it has enough confidence in the US economic revival to start modest tapering of its US$85 billion a month bond-buying programme, which would bolster the greenback.

"We have got a busy week for New Zealand dollar, this is the final week before we all go away on seasonal holidays and the overseas data calendar is pretty packed as well," said Sam Tuck, senior manager FX at ANZ New Zealand. "I pretty much assure you that we are going to get some decent moves this week, probably in both directions."

Reports out this morning showed New Zealand consumer confidence rose to its highest level in about four years in the fourth quarter and services sector activity slipped from a six-year high in November, while remaining at an elevated level.

Ahead this week, New Zealand's positive economic story is expected to show through in the government's half year fiscal update tomorrow, current account report on Wednesday and third quarter growth data on Thursday.

Global currency markets are focused this week on the Fed's Dec. 17-18 meeting, which will include its full economic projections, with speculation focused on whether the bank will start tapering or change its guidance.

"It's a big meeting and it is rounding up the end of the year," said ANZ's Tuck. ANZ bets there is a 55 percent probability the Fed will start modest tapering of about US$10 billion at this week's meeting.

New Zealand's GDP report is released just four hours later.

"You could get strong US dollar on Thursday morning and then a strong kiwi on GDP which could mean you go all over the place," Tuck said. "You might well end up unchanged on the day but you have had a bit of a round trip."

Later today, measures of manufacturing activity are scheduled for release in China, Europe and the US. These reports are important for the kiwi because the stronger the global economy becomes, the less the New Zealand dollar stands out from a strength perspective, ANZ says.

Key indicators of US regional growth will be seen in the New York Empire manufacturing survey tonight and the Philadelphia Fed survey on Thursday, Tuck said.

For Japan, the key Tankan fourth quarter business confidence survey is due later today.

In Australia, traders will be eyeing the Reserve Bank of Australia minutes of its last meeting tomorrow and the government's Midyear Economic Forecasts which is expected to show the budget deficit widened. Governor Glenn Stevens, who last week signalled a weaker Aussie is preferable over lower interest rates to help spur the economy, is scheduled to testify to parliament on Wednesday.

Sterling is likely to be an active currency this week, with the Bank of England scheduled to release the minutes of its last meeting on Wednesday and data due on inflation, retail sales and unemployment.

In Europe, traders will be eyeing a key report on German business confidence, comments by European Central Bank president Mario Draghi and a European Leaders Summit where agreements may be cemented on a banking union.

Volatility is likely at the end of the week as liquidity dries up ahead of the holiday period and as investors pull back on riskier positions, Tuck said.

"We are just really expecting a bit of a volatile week which is quite hard to read."

BusinessDesk.co.nz

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