Weekly Outlook: RBNZ Could Make or Break Kiwi This Week

After rallying for weeks, the Kiwi peaked at a five month high of .6580, only to tumble over 200 points lower and bottom out at .6355 amidst precipitating commodity prices and negative sentiment from not only Standard & Poors, but also New Zealand Finance Minister Michael Cullen. Should the Reserve Bank of New Zealand comment dovishly on the economy when they announce rates on Wednesday, the week could prove to be most profitable for Kiwi shorts.

After a week of sparse economic data, traders may find themselves deluged with information in the upcoming days. The main focus of the week will be on the RBNZs rate decision on Wednesday, as the central bank is likely to hold rates at 7.25%. While the benchmark has served as a point of strength for the New Zealand dollar given its significant carry-trade differential against other currencies, the high cost of borrowing has started to lead to a slowing in economic growth. The decision could be difficult for the central bank, however, as inflation pressures continue to mount in a tight labor market. Other economic indicators this week include the Q2 terms of trade index, which is likely to fall to -0.5% and show that import growth accelerated as New Zealand consumers purchased more foreign items at a higher price. While exports are predicted to have risen as well, the gain may not be enough to offset other factors. Solid consumption as a result of strong wage growth should lead to higher retail sales as well, with the figure anticipated to post at 0.3% in the month of July from 0.1%. Firms are likely to have benefited from increased exports, as Business PMI should hold above the 50 boom/bust level after rising to 53.9 in July from 52. Although the Kiwi was not as weak in August as it was in July, the national currency is still valued much lower than it was at this time last year, giving foreigners more incentive to purchase goods from New Zealand. Manufacturing activity in Q2 could be similarly optimistic on the back of international demand. To wrap up the week, Non Resident Bond Holdings may indicate that more than 70% of bonds are held abroad, as interest rates in New Zealand far exceeds that of countries in Asia.

With only one economic release on the plate last week, the New Zealand dollar traded more on commentary than on fundamentals. Commodity export prices, as measured by ANZ National Bank, gained 0.4% in August following Julys rise of 0.5%, led by increases in apples, beef, and wood pulp. The jump in world prices serves to benefit the New Zealand economy, as export values should be boosted. Traders responded more strongly to warnings by Standard and Poors, however, when they said that record current account deficit is putting` pressure on the nation's AA+ long-term, foreign currency credit rating. The shortfall in the current account widened to a massive 9.3% of GDP in Q1 2006, but S&P said that low levels of government debt and strong fiscal management help to offset the risks of the balance. Later in the week, comments from New Zealand Finance Minister Michael Cullen led to a waterfall drop of the Kiwi, as he said, The resurgence in the currency wont continue and it will settle back a bit?.the current-account deficit may take three years to narrow, so there are less reasons to own the currency. With interest rates already at a record-high of 7.25% and the central bank unlikely to hike further, Cullens argument quickly became reality and could be exacerbated upon similar rhetoric next week.

Economic Releases for September 10 September 15<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />