By Roger J Kerr

The balance of evidence still suggests that the NZD/USD exchange rate should break out of its tight 0.8100 to 0.8300 range of the last two months to the downside.

Yet again it will be economic and financial market developments in Australia that will determine the Kiwi dollar’s near term direction.

It is a big week ahead for the Aussie markets with their RBA review of their OCR interest rate on Tuesday. The RBA likes to keep the markets guessing in respect to their interest rate changes, however many argue that having cut the rate by only 0.25% in October they are unlikely to leave it at that.

To have any behavioural impact at the household level in respect to consumer spending and housing decisions, a 0.50% reduction is needed.

Therefore another 0.25% cut to 3.0% has to be expected on Tuesday.

RBA Governor Glenn Stevens did signal back in October that an important pre-condition to any further easing of monetary policy was confirmation of weaker economic data. Arguably we have not seen any great slowdown in retail and jobs numbers in Australia over recent weeks. However, job adverts are reducing sharply.

The economist fraternity is marginally in favour of a rate cut with 16 out of 23 Aussie economists’ surveyed picking a reduction.

A rate cut would weaken the AUD from its current position of $1.0425 against the USD. The Kiwi follows the AUD religiously; therefore a cut by the RBA may have the Kiwi dollar testing its support levels at 0.8100 this week.

There is a whole swag of Australian economic data being released this week, ahead and after the RBA decision on Tuesday:

• Monday - Retail sales for October.

• Tuesday – Building approvals and Current Account

• Wednesday – GDP growth for September quarter

• Thursday – Jobs figures for November Actual results below prior forecasts for all these economic releases should see the AUD lower.

One wonders if the RBA officials will get a sneak preview of the numbers to aid their OCR interest rate decision.

A “no change” interest rate decision in Australia would propel the AUD higher and this is not what the RBA want to see. Already their manufacturing and tourism sectors are suffering badly from the impact of the strong AUD currency value.

Global influences on the AUD and NZD are currently centred on the fiscal cliff negotiations in the US. Despite early indications that there was some compromise in the air on taxation policy, more recent developments suggest that the Democrats and Republicans are still a long way apart on how tax revenue is increased.

Market volatility is still set to increase due to the uncertainties surrounding the US fiscal policy debate.

Increased equity and currency market volatility is negative for the AUD and NZD. The AUD/USD exchange rate has bounced off $1.0200 on several occasions over recent months, Australian and international events this week may well see that key support level tested to the downside.

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 Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com