NZ Dollar Outlook Kiwi likely to take its lead from US as Fed’s Bernanke speaks

The New Zealand dollar will probably take its lead from the US this week, where traders will be looking for guidance from Federal Reserve chairman Ben Bernanke on future monetary stimulus.

The local currency may trade between 76 US cents and 79.50 cents this week, according to a BusinessDesk survey of 10 traders and strategists. Four expect the New Zealand dollar to remain unchanged, five predict a decline while one expects a gain. The kiwi recently traded at 77.87 US cents, little changed from late New York trading Friday, and down from 78.68 cents at the 5pm close in Wellington.

Currency markets are being driven by expectations of when the Fed is likely to start tapering its US$85 billion a month asset purchase programme, which has debased the greenback. All eyes will be on comments by Bernanke this week after he reassured markets last week that the stimulus, known as quantitative easing, wouldn’t evaporate any time soon.

“Fed tapering expectations remain the key driver of the USD and currency markets,” Bank of New Zealand currency strategist Mike Jones said in a note. “From this perspective, Fed chairman Bernanke’s semi-annual testimony to Congress Thursday promises to be this week’s main event. Investors will be looking for even more clarity on the expected timing of QE tapering.”

Bernanke is scheduled to deliver his semi-annual monetary policy report to Congress, testifying before the House Financial Services Committee in Washington on Wednesday and the Senate Banking Committee on Thursday.

Markets have been volatile as traders bet on when the Fed will start reducing stimulus in the world’s largest economy. Bernanke last month said the central bank may taper bond purchases later this year and end the programme around mid-2014 as long as the economy continues to improve in line with the Fed’s forecasts.

“We can expect more of the same this week,” said the BNZ’s Jones. “Local fundamentals remain highly supportive of the currency. Additional steep falls in the NZD/USD are unlikely.”

In the coming days, investors will get plenty of US economic reports. Today’s publications include retail sales, business inventories and the Empire State manufacturing survey. Inflation, industrial production and the house market index are scheduled for release tomorrow, while housing starts are out on Wednesday and the Philadelphia Fed survey as well as leading indicators are due Friday.

The Fed’s Beige Book business survey, which is based on reports from its regional banks, is scheduled for release on Wednesday. Fed officials will consider the report as they continue a debate when to start curtailing the pace of bond purchases.

Meanwhile, in New Zealand, annual inflation may have returned to 14-year lows in the second quarter as a record high currency weighed on prices of imported clothing, competition drove down telecommunications costs and fuel costs fell. The nation’s latest inflation figures are published at 10:45am tomorrow.

The consumer price index probably rose 0.3 percent in the second quarter for an annual pace of 0.8 percent, according to a Reuters survey of 10 economists and the Reserve Bank’s latest estimates. That would mark the fourth straight quarter where inflation has undershot the central bank’s 1 percent-to-3 percent target range.

Traders see zero chance that the central bank raises the official cash rate from 2.5 percent at its next review on July 25. However, they see 47 basis points of hikes in the next 12 months – equivalent to about two quarter-point increases, based on the Overnight Index Swap curve.

“Confirmation of another CPI print below the RBNZ’s 1-3 percent target band may encourage OIS markets to trim the 50 basis points worth of hikes now priced into the curve, weighing on the NZD,” said BNZ’s Jones.

On Wednesday, the latest global dairy trade auction will be watched for signs of continued strength in commodity prices, which has helped underpin the kiwi.

On Thursday, ANZ-Roy Morgan consumer confidence and ANZ job advertisement surveys are released while Friday sees the publication of New Zealand net migration and credit card billings.

Traders will be eyeing growth data out of China at 2pm New Zealand time today for signs of a slowdown in Asia’s largest economy. China’s economy probably expanded at an annual pace of 7.5 percent in the second quarter, down from an annual pace of 7.7 percent in the first quarter, according to Reuters polls. That marks a far cry from the double-digit growth common in the past three decades.

Currencies of China’s major trading partners, including the New Zealand and Australian dollars, weakened after China’s Finance Minister Lou Jiwei was quoted late last week as saying growth could be 7 percent this year. The official Xinhua News Agency later corrected the report, saying there was no doubt China could achieve the targeted 7.5 percent growth.

China is also scheduled to publish reports on industrial production and retail sales today.

Central banks are on the radar this week. Tomorrow, the Reserve Bank of Australia releases the minutes of its most recent meeting. The New Zealand dollar touched an almost five-year high against the Australian dollar Friday as an improving New Zealand economy contrasts with a slowdown in Australia. The minutes are likely to restate the bank’s easing bias and preference for a lower currency, said the BNZ’s Jones.

Traders will be assessing how close the bank was to cutting rates after governor Glenn Stevens commented that they deliberated for a very long time, Robin Clements, senior economist at UBS New Zealand, said in a note.

On Wednesday, the Bank of England releases the minutes of its first meeting with new governor Mark Carney at the helm and the Bank of Japan also releases the minutes of its last meeting.

The Bank of Canada is expected to keep its benchmark interest rate at 1 percent and markets will be watching whether it retains its mild hawkish bias under new governor Stephen Poloz, Jones said.

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