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NZ dollar outlook: Kiwi may fall before Jackson Hole summit

NZ dollar outlook: Kiwi may fall ahead of Jackson Hole summit

By Jason Krupp

Aug. 22 (BusinessDesk) - The New Zealand dollar may fall this week as investors, spooked by the prospect of the global economy slipping back into recession, continue to pull out of higher yielding, or riskier assets ahead of a central bankers' summit at Jackson Hole on Friday.

Seven of the eight economists and market strategists surveyed by BusinessDesk saw the kiwi falling in line with global equity markets. One saw the kiwi trading higher as speculators take positions in the kiwi and buy on the dips.

The kiwi, which recently traded at 81.76 U.S cents, may trade between a median range of 80 U.S cents and 83.80 cents this week, according to the poll.

Global equity markets look set for another volatile week ahead of the central bankers’ summit at Jackson Hole at the end of the week, where Federal Reserve chairman Ben Bernanke will kick off proceedings with a keynote speech on the ailing U.S. economy.

In a similar fashion to last year's meeting, investors are betting Bernanke will layout the policy tools available to the Fed that it can use to jolt the world's biggest economy out of it downward spiral, with the market looking for hints on a possible third round of quantitative easing.

The market is likely to go away from the meeting empty handed though, according to Darren Gibbs, an economist at Deutsche Bank, with rising inflationary pressures in the U.S. standing in the way of another round of massive asset purchases by the Fed.

"The market is completely focused on Jackson Hole, so I think things are going to be moving sideways to risk-off as week goes on, hoping for something out of the meeting which is not going to materialise," Gibbs said.

That should continue to put pressure on equities and growth-linked assets, such as the New Zealand dollar, as investors pull out of the so-called risk positions in favour of the safety of government bonds and gold.

The precious metal recently traded at US$1,851.65 an ounce, having hit a fresh historic high of US$1,877 on Friday in New York, while yields on U.S. 10 year Treasuries briefly dipped briefly below 2%, the lowest level since 1954.

Declines in the kiwi are however expected to be capped at the key 80 U.S. cent support level, with market positioning in the currency set limit declines.

"When the kiwi dropped from 88 U.S. cent to 80 cents you had a lot of people who owned risk currencies get out and take their money home," said Derek Rankin, a director at Rankin Treasury Advisory. "Now it's really difficult for that to happen because a lot of money that that would have left has already done so any selling is going to be more circumspect."

The kiwi may take some direction from Reserve Bank's survey of inflation expectations for the September quarter and the merchandise trade survey for the July quarter, which are scheduled to be released tomorrow and Wednesday respectively.

"Both data should print on the stronger side, but the reality is that any rallies in the currency will be short lived," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "We've still got the global situation and that will be the main focus, so the kiwi will continue to be under pressure."

The inflation survey in particular will be under the spotlight, as markets try and assess how cost increases will factor into the Reserve Bank's policy outlook.

The recent rout on of global equity markets has see economists pare back their expectations of when Governor Alan Bollard will begin removing the emergency 50-basis point of stimulus put in place in the wake of the Christchurch earthquake in February.

The market is betting that the bank will raise rates by 41 basis points in the next 12-months, according to the Overnight Swap Index curve, down from 105 basis points on Aug. 1. The official cash rate currently stands at 2.5%.

"The risk is that the two year inflation expectation eases from the 3% level, and that'll see the market take some of the pricing out of a September hike," said Jo Capurso, a currency strategist at Commonwealth Bank Australia in Sydney.

On the crosses, traders will be keeping a close eye on the Swiss franc and Japanese yen, after both countries signaled that they were willing to intervene further in a bid to halt the appreciation of their currencies.

The flight to safety has seen the Japanese yen recently trade at 76.62 yen to a U.S. dollar, near its lowest level since World War II, a mill stone for the export centric Japan. The Swiss franc recently traded at 88.32 euro cents, a historic high against the single euro zone currency.

"It does feel like the whole strategy of managing the weakness in the U.S. dollar at the moment is against the Japanese yen and Swiss franc," said Dan Bell, senior currency strategist at HiFX in Auckland.

The New Zealand dollar may fall further against the Australian dollar this week, with the lack of liquidity in the kiwi likely to exacerbate risk-off movements. The kiwi may trade between a median range of 78 Australian cents and 79.50 Australian cents, according to the poll.


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