Dollar Outlook: Kiwi may gain as rate decision looms

Photo / Dean Purcell

The New Zealand dollar may advance as traders eschew an out-of-favour greenback and seek growth assets Downunder, where central banks stand ready to raise interest rates and widen the gap with America's record-low benchmark.

The kiwi's gains may be capped at 73.50 US cents this week and would struggle to push above 74 cents, according to six strategists surveyed by BusinessDesk. It will likely find support at around 71 cents, the survey shows.

Looming on the radar is Wednesday's release of Australia's consumer price index for the second quarter, which will show inflation accelerated to 1 per cent in the three months through June 30, from 0.9 per cent in the first quarter, for an annual pace of 3.4 per cent.

The Reserve Bank of Australia held off on raising its cash rate this month, saying it would await further evidence of Europe's recovery and bank stress tests, and signs of faster inflation at home.

European Union regulators released the results of the so-called bank stress tests on Friday, showing only seven out of 91 European banks are in danger of defaulting.

While some commentators questioned the veracity of the tests, the report does indicate a low probability of systemic failure in the region's banking system. Adding to a better picture for Europe and stoking investors' appetite fro riskier or higher-yielding assets, Germany release a survey showing a pick-up in business confidence.

"If you look at this, and the underlying economic picture that's improving, then an adverse scenario under the stress test shouldn't happen," said Alex Sinton said, senior dealer at ANZ National.

The kiwi traded at 72.62 US cents this morning and has gained from 72.40 cents in New York on Friday.

Traders are awaiting the Reserve Bank of New Zealand's interest rate review on Thursday, which is expected to hike the official cash rate a quarter point to 3 per cent, the second monthly increase that marks a resumption of a tightening cycle for the first time in three years.

The Australian and New Zealand dollars could continue to attract investors shunning 'safe-haven' currencies like the greenback and yen, said Bank of New Zealand strategist Mike Jones.

"European markets' response to Friday's stress test results will hold the key on whether last week's positive sentiment can continue into this week," Jones said. "We're a little cautious on this front. Data-wise the highlight of the week will no doubt be US Q2 GDP on Friday. More disappointment on the strength of the US economy would see the USD's fall from grace continue."

Rankin Treasury Advisory consultant, Garry Wycherley said as European banks survived their stress tests, the greenback will come into sharp focus worldwide as America shows yet again and unlike other countries, it is not facing up to its debt issues.

"Europe and Britain faced up and made hard decisions," Wycherley said. "The markets will continue to sell US$ and buy euros, and the New Zealand and Australian dollar to balance their portfolio."

Westpac senior markets strategist Imre Speizer said the market has already factored in the Reserve Bank's expected quarter per cent cash rate rise to 3 per cent.

In the Reserve Bank's Thursday announcement "we expect to be a continuation of the reduction in stimulus," said Tim Kelleher of the Commonwealth Bank of Australia.

Other influential data will be the announcement early in the week of US housing data with weakness likely to encourage Federal Reserve to keep its highly stimulatory monetary policy.