The focus turns to domestic developments this week with the main event being Thursday's RBNZ Monetary Policy Statement.

We also get a raft of domestic data, some rescheduled from last week, which will give us a better steer on how Q2 GDP fared.

While construction activity slumped, we see sufficient strength in other sectors to support a solid Q2 GDP print. While lagged, such "momentum", and the Rugby World Cup, which kicked off last Friday, are providing important crutches of support amidst a fragile global scene.

RBNZ MONETARY POLICY STATEMENT PREVIEW

Were it not for the deteriorating global outlook and financial market volatility, the RBNZ would be removing the 50bp insurance cut taken out in March this Thursday.

We still believe the current level of the OCR is on borrowed time, given the improving momentum in the New Zealand economy and clear inflation pressures.

But the RBNZ will want greater clarity around the global situation before deciding to hike rates. As such, we see the RBNZ maintaining a clear tightening bias, but the removal of the insurance cut will very much be dependent on global financial risks receding, even if this means taking a chance on inflation.

MONTHLY INFLATION GAUGE

Our monthly inflation gauge recorded a 0.4 percent decline over August, the largest monthly decline since we started compiling this series in 2008. Part of the fall can be attributed to seasonal factors. There were also a couple of influential one-off price declines. While our inflation gauge is pointing to a subdued non-tradable CPI print for Q3, this masks mounting underlying inflation pressure - particularly for construction-related costs. We will also be paying close attention to services-related prices in our inflation gauge for any evidence of spillover from elevated inflation expectations.

INTEREST RATE STRATEGY

We expect the focus to shift away from global events and towards the domestic outlook in the lead-up to Thursday's RBNZ Monetary Policy Statement. Although pre-conditions for an OCR hike (global financial stability) can't be satisfied, and the Governor is likely to be somewhat cautious following his visit to Jackson Hole, we expect the tone of the MPS to mirror the better tone of the domestic data pulse. By contrast, US markets are likely to tread water ahead of next week's announcement of details of Obama's stimulus plan and FOMC meeting.

CURRENCY STRATEGY

The focus for currency markets turned from the SNB's unilateral action to weaken the CHF early last week, towards increasing speculation about Greek default and euro exit, sending EUR sharply lower and dragging the NZD down. A lack of co-ordinated action from the G7 leaves EUR very vulnerable this week. RBNZ will be on hold this week but global events will continue to dominate. While NZD has further downside, we expect key support at 0.80 to hold for now.