Dollar Outlook: Kiwi stable as OCR announcement looms

Photo / Martin Sykes

The New Zealand dollar will probably stay within its recent range this week as investors prepare for the Reserve Bank's monetary policy statement, which is expected to see interest rates kept on hold.

Five of six economists and strategists in a BusinessDesk survey expect the kiwi will hold in the middle of its medium-term range between 74 US cents and 76 cents ahead of this week's central bank meetings in New Zealand and the US The lone dissenter expects the kiwi to head lower amid heightened expectations of rising interest rates in China.

Economists expect central bank Governor Alan Bollard will keep the official cash rate at 3 per cent after New Zealand dodged a double-dip recession last year, and last week's benign inflation and tepid retail sales data won't have given him reason to tighten rates early.

Analysts now expect Bollard will start lifting rates in September, with 68 basis points of hikes priced in over the next 12 months, according to the Overnight Index Swap curve.

"It looks like the Reserve Bank will retain its dovish tone from the December statement, and cap (rates) from a domestic point of view, especially with the weaker retail numbers last week," said John Horner, currency strategist at Deutsche Bank in Sydney.

"While we think the outlook for New Zealand economy is not as bad as all that, we continue to buy on weakness rather than chase any strength."

At the same time, investors are preparing for the Federal Open Market Committee to review monetary policy in the U.S. Federal Reserve chairman Ben Bernanke is expected to keep interest rate near zero and continue to print money in a bid to revive the world's biggest economy, ahead of fourth-quarter gross domestic product data on Friday in the US The kiwi rose to 75.82 US cents from 75.46 cents on Friday in New York.

Horner was the lone dissenter, who's picking the kiwi dollar to lose ground this week amid fears China will tighten monetary policy after the world's second biggest economy raised the reserve ratio requirement for lenders to a record 19.5 per cent last week.

The People's Bank of China is trying to rein in liquidity and damp housing prices as inflation and economic growth remain strong.

Derek Rankin, director at Rankin Treasury Advisory Ltd., said the prospect of a slowdown in China will weigh on the Australian dollar, which faces lower interest rates for longer as the Queensland floods hold back the recovery.

"Australia has been seen as better than New Zealand, but it has real issues now," Rankin said. The Reserve Bank of Australia "isn't going to raise interest rates" and the kiwi will likely range-trade on that cross, he said.

The kiwi was little changed at 76.66 Australian cents from 76.52 cents on Friday in New York.

Rankin said the major issue for the kiwi in the coming weeks will be whether investors see more upside in the U.S. or Europe.

Record German business confidence on Friday had traders eschewing the greenback in favour of the euro, as fears about the region's debt problems eased. That had seen the kiwi fall against the euro, pound, Swiss Franc and Rankin said the currency could be in for a substantial decline if it falls much further against those cross-rates.

The kiwi fell to 55.70 euro cents from 55.91 cents on Friday in New York, and was unchanged at 47.40 pence.

It dropped to 0.7269 Swiss francs from 0.7291 last week.

Robert Rennie, chief currency strategist at Westpac Banking Corp.
in Sydney, said hawkish comments from European Central Bank President Jean-Claude Trichet had the market preparing for the region's central bank to eventually hike interest rates this year.

That's left traders debating as to whether the greenback or euro will rally, and largely put the Australian and New Zealand dollars on the side-lines, he said.

Strategists were split on whether the kiwi's prospects on a trade-weighted basis this week, with three predicting little change, and three giving a negative bias over the euro's strength.

The kiwi was little changed at 67.80 on the trade-weighted index from 67.71 on Friday in New York, and rose to 62.63 yen from 62.50 yen.

On the data radar this week is the performance of services index tomorrow and the government's five-month financial statement on Thursday, with central bank FX flows on Friday.

Australia has a public holiday on Wednesday and will release inflation data tomorrow, though that won't capture the impact of the floods. Investors will also be watching US President Barack Obama's State of the Union address on Tuesday in the US, and the Bank of Japan's interest rate review tomorrow.