NZ Dollar Outlook: Kiwi may fall in week of central bank event risk

Monday 3rd December 2012 1 Comment

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 dollar 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 dollar 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 percent, 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 percent.

"There's no obvious directional clue for the week ahead," said 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 - US$607 billion of spending cuts and tax hikes that kick in on Jan. 1 - were "nowhere." 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," said 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 percent chance of an RBA rate cut tomorrow even after capital spending figures showed investment in the resources sector isn't drying up as expected. The rate cut will narrow the gap with New Zealand interest rates, though traders said some of that was already priced into the cross rate.

The kiwi dollar 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 percent, while figures today may show growth in retail sales slowed to 0.4 percent in October, according to a Reuters survey.

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

He has a positive bias for the kiwi this week on the basis that the RBNZ won't 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 said.

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

Japanese elections on Dec. 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 said.

Alex Sinton, senior dealer at ANZ New Zealand, said he 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."

He said 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 doesn't finish the week "a little bit lower."

BusinessDesk.co.nz

Comments from our readers

On 3 December 2012 at 2:54 pm Tim said:

Definitely interesting how the fiscal cliff is impacting us over here in NZ. But I'm a bit sceptical on the 'politicians controlling the markets right now' statement. I doubt the markets haven't priced in some of the expected fiscal consequences. Speculators are driving and will be driving short-term volatility but I believe fundamentals are positive long-term. Good news is coming out of China and the U.S. and so if markets could get a little bit more certainty in Europe I think going long is a good bet.