NZ Dollar Outlook: Kiwi may decline as weak inflation damps forecasts for rate hikes

Monday 20th October 2014

The New Zealand dollar may decline this week on the expectation weak inflation data will prompt a pull back in forecasts for future interest rate hikes, reducing demand for the local currency.

The kiwi will probably trade between 77.80 US cents and 81 cents, according to a BusinessDesk survey of eight traders and strategists. Five expect the local currency to decline, while two pick it to rise and one said it would likely remain largely unchanged. The New Zealand dollar recently traded at 79.19 US cents.

The local currency may consolidate in the early part of this week, following last week's volatility. However the kiwi may decline towards the end of the week should US inflation data strengthen and New Zealand inflation weaken, bolstering the case for a stronger US dollar.

"The risk is we will see kiwi lower by the end of the week - it doesn't mean it can't go back to 80 cents first though," said Tim Kelleher, head of institutional foreign exchange sales at ASB Bank.

New Zealand inflation probably accelerated 0.5 percent in the third quarter, for an annual rate of 1.1 percent, slowing from a 1.6 percent annual rate in the previous quarter, ASB said. That would put the measure near the bottom of the Reserve Bank's 1 to 3 percent band, and below its 2 percent target, weakening the case for governor Graeme Wheeler to raise interest rates further following four hikes so far this year.

"One of Graeme Wheeler's concerns is that there is no inflation," said the ASB's Kelleher. "The market got a little bit aggressive on the RBNZ tightening cycle and it is being slowly priced out. Sentiment is starting to change, you are starting to see the market slowly price in less aggressive rate hikes for next year."

As well as Thursday's inflation data, New Zealand also has consumer confidence this afternoon, migration tomorrow, and trade and high-debt lending data on Friday.

In China this week, the focus will be on the release of third quarter gross domestic product data tomorrow amid concerns the world's second-largest economy is going to miss its 7.5 percent growth target this year for the first time since the 1998 Asian financial crisis. The Chinese economy probably expanded at a 7.2 percent annual rate in the third quarter, following growth of 7.5 percent in the second quarter and 7.4 percent in the first quarter, according to Reuters estimates.

China's central bank is planning to inject 200 billion yuan into the banking system to bolster growth, the Wall Street Journal reported at the weekend, citing unidentified financial executives who had been briefed on the matter.

Other data in China this week includes retail sales and industrial output tomorrow, the HSBC flash manufacturing PMI on Thursday and house prices Friday.

The Australian Reserve Bank will tomorrow release the minutes to its last meeting, and officials including assistant governor economic Chris Kent, deputy governor Philip Lowe and governor Glenn Stevens are scheduled to speak this week. Australia publishes third quarter inflation data on Wednesday.

In Europe, all eyes will be on Eurozone flash PMI data scheduled for release on Thursday, while the UK has retail sales on Thursday and GDP on Friday.

BusinessDesk.co.nz

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