Dollar Outlook: Kiwi may struggle to push higher this week

The New Zealand dollar may struggle to push higher from a 14-month high this week as speculation grows for more aggressive rate hikes in Australia and after Federal Reserve chairman Ben Bernanke said US monetary conditions would be tightened as growth returned.

Five of eight strategists, traders and economists in a BusinessWire survey say the kiwi may hit a ceiling this week and will struggle to make new ground. Two predict it will gain and another says there is more risk it drifts lower. The kiwi was recently at 73.36 US cents, down from last week's peak of 74.5 cents.

Bernanke told a conference in Washington last week that the Fed is prepared to raised interest rates from near zero when the US economy picks up enough steam. "At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem." Terry McCrann, a columnist and well-known RBA watcher for the Australian newspaper, wrote on Saturday that the central bank may raise its key rate by 50 basis points to 3.75 per cent on Melbourne Cup Day, November 3, when its board meets.

The gap between the Reserve Bank of New Zealand's official cash rate and the RBA's key rate widened to 1.25 percentage points with last week's surprise RBA move to hike borrowing costs.

Local New Zealand data, including retail sales and house prices, are likely to add to evidence the economy is reviving, while the Consumer Price Index is likely to show inflation remains benign. The other key to the direction of financial markets is in the US earnings season, with banks preparing to release their results this week.

"International themes will be the big drivers this week," said Philip Borkin, economist at ANZ National Bank. The kiwi has started off the week on the back foot and we expect it to remain a bit heavy as people consider interest rate differentials."

Reserve Bank Governor Alan Bollard has said he doesn't expect to raise interest rates until the second half of 2010, keeping the OCR at a record low 2.5 per cent. Markets are starting to price in an earlier tightening, betting the RBNZ will be influenced by the RBA's moves amid evidence the domestic economy is climbing out of its slump.

"Market pricing is now consistent with a 25 basis points rate hike from the RBNZ in January and about 100-125 basis points of tightening over the next twelve months," said Danica Hampton, currency strategist at Bank of New Zealand. "The sooner-than-anticipated RBA rate hike saw investors bring forward the timing of anticipated RBNZ rate hikes," she said. "This still looks overly hawkish to us."

US stocks finished higher on Wall Street on Friday, amid optimism earnings will surprise on the upside. Alcoa Inc., the first company on the Dow Jones Industrial Average to post its results, reported a profit of 4 cents a share, against expectations of a loss of 9 cents.

Among US companies posting earnings this week are Goldman Sachs Group, Google and Johnson & Johnson. Companies on the S&P 500, on average, are expected to record their ninth straight quarter of weaker profits.

New Zealand retail sales probably rose 0.5 per cent in August after a same-sized decline in July. The government figures are released tomorrow. Real Estate Institute figure on Wednesday may show house prices moved higher in September, after a 1.2 per cent gain in August.

On Thursday, Statistics New Zealand releases the Consumer Price Index for the third quarter, that is expected to show the annual rate eased to just 1.2 per cent, near the bottom end of the central bank's target range and giving the RBNZ little reason to hike rates aggressively.

"If we get a decent retail report it will get people geed up about the kiwi again," said Imre Speizer, senior market strategist at Westpac. "There'd be no reason to think we will not break 74.5 (US cents), last week's high, even though it's looking technically overstretched."

Rounding out the week, Australian business confidence figures are out tomorrow and consumer confidence on Wednesday. The Federal Reserve is due to release the minutes of its last policy meeting that day and inflation data on Thursday.

-BUSINESSWIRE