Dollar Outlook: Kiwi likely to tread water until CPI data, risk aversion rises

The New Zealand dollar will likely trade within its recent ranges as investors wait for local consumer price index data on Wednesday to give indications on when the central bank will move in hiking interest rates.

Four of seven economists and strategists in a BusinessWire survey predict the currency will stay in familiar territory this week ahead of the CPI data on Wednesday.

That data is expected to show inflation was flat in the three months through December, and may force the Reserve Bank of begin tightening monetary policy earlier than previously indicated.

Two predicted the currency may fall as investors eschew higher-yielding assets in favour of more conservative, safer options. One analyst predicted an upward bias for the kiwi against the greenback.

Economists predict central bank Governor Alan Bollard will hike the official cash rate as much as 75 basis points by the end of June as prices rise ahead of the regulator's expectations and force him to act earlier than previously indicated.

House prices edged up a further 1.4 per cent to a national median $360,000 last month according to Real Estate Institute data released today, and are now only 3.8 per cent below their 2007 peak.

Markets are betting Bollard will hike rates by 200 basis points over the coming 12 months, according to a Credit Suisse Index based on the Overnight Index Swap curve.

"The big data this week will be the CPI and retail sales - that'll perk people up if both are stronger than expected," said Chris Tennent-Brown, economist at Commonwealth Bank of Australia. "People won't come to massive conclusions if the CPI comes out stronger as rate hikes are expected about several meetings away."

Tennent-Brown said the kiwi may trade between 72.50 US cents and 74 cents this week, though any indications that the central bank will move earlier than expected will have more bearing on the cross rate with the Australia dollar rather than the greenback.

The Reserve Bank of Australia is likely to hold interest rates after hiking three times last year. The kiwi rose to 79.76 Australian cents from 79.63 cents last week. However, it dropped to 73.48 US cents from 73.80 cents on Friday in New York, as increasing risk aversion underpinned the greenback.

The Dollar Index, a measure of the greenback against a basket of six currencies, climbed 0.2 per cent to 77.17 as traders eschewed riskier assets, such as the euro, after stocks on Wall Street took a knock from concerns in investment bank JPMorgan's fourth-quarter earnings and ongoing fiscal problems in Greece.

Imre Speizer, markets strategist at Westpac Bank, said "risk aversion seems to have risen from Friday" and he predicts a pullback in the kiwi dollar towards 72 US cents and 73 cents.

China releases a slew of data this week, including gross domestic product, CPI and retail sales, and investors will continue to watch whether the world's third largest economy can continue to drive the global recovery.

Mike Jones, strategist at Bank of New Zealand, said traders are paying China developments "a little more heed" with the country's fortunes "crucial" to the recovery, particularly for the trans-Tasman economies which are closely tied to Chinese demand for raw materials.

Jones said they will be keeping an eye on the kiwi dollar's cross rate with the yen, which he predicts will test 70 yen at some stage in the coming weeks. The currency edged down to 66.81 yen from 66.97 yen on Friday in New York.

All seven economists surveyed expect the currency will be range-bound this week on a trade-weighted basis, though two had upward biases.

The currency dropped to 66.57 on the trade-weighted index, or TWI, a measure of the currency against the yen, euro, pound, and Australian and US dollars, from 66.67 last week.

The kiwi was little changed at 51.17 euro cents from 51.21 cents last week, and slipped to 45.15 pence from 45.19 pence, after European Central Bank President Jean Claude Trichet reaffirmed his position that Greece wouldn't receive any "special treatment". This is in spite of its precarious fiscal position that's caused its credit rating to be downgraded by Fitch and Standard & Poor's over the past few months.

Also on the data radar this week are November's retail sales on Thursday, along with the Bank of New Zealand-Business NZ performance of manufacturing index and the ANZ Roy Morgan consumer confidence survey.

Germany's Zew survey of business sentiment comes out tomorrow, while American housing, manufacturing and employment data are also out at the tail-end of the week.

The Bank of Canada will review its benchmark interest rate this week, and while it isn't expected to move it will give an update on the state of the country's economy, while the Bank of England's minutes from its last meeting are released on Wednesday.