NZ dollar climbs above 73 US cents as Wheeler sticks to his guns, Yellen looms

Tuesday 23rd August 2016

The New Zealand dollar rose above 73 US cents after Reserve Bank governor Graeme Wheeler signalled no change in the stance of monetary policy, disappointing some in the market that had expected a more dovish tone to today's speech.

The kiwi rose to 73.16 US cents as at 5pm in Wellington and touched 73.25 cents immediately after the speech was released at 9am NZ time, from 72.16 cents late yesterday. The trade-weighted index rose to 77.38 from 76.64.

In a speech to the Otago Chamber of Commerce, written by Wheeler and delivered by assistant governor John McDermott, the central bank reiterated that it saw 35 basis points of further cuts to the official cash rate while pushing back against critics who have called for either deeper cuts or no change to rates. Wheeler is being forced to defend monetary policy because inflation has undershot the policy targets agreement for almost two years, Auckland property prices are continuing to rise and the kiwi dollar, as usual, is tracking above the average rate the bank projected in its latest forecasts.

"It's fair to say that the market was probably expecting something on the dovish side so a short market was squeezed higher because they were disappointed," said Mark Johnson, senior dealer at OMF. "There was nothing new in it. They've still got 35 points of rate cuts in the bill track."

Johnson said the kiwi will probably remain in its recent range of about 70.5 US cents to 73.5 cents through this week, ahead of Federal Reserve chair Janet Yellen's speech at the Jackson Hole central bankers' retreat next weekend. Like the RBNZ, the Fed has struggled to clearly telegraph the pace and direction of monetary policy.

San Francisco Fed President John Williams last week said the central bank should cut sooner rather than later, while Fed vice chairman Stanley Fischer said the bank was close to hitting its targets on employment and inflation, prerequisites for a rate hike. Yet a paper put out of Fed staffers, which is intended to provoke debate rather than reflect official policy, suggested the only reason to hike rates would be to give the Fed ammunition to cut rates again if needed.

Johnson said the traders are betting there's a 48.1 percent chance the Fed hikes in December.

The local currency rose to 95.71 Australian cents from 95 cents late yesterday and rose to 4.8668 yuan from 4.8072 yuan. It rose to 64.57 euro cents from 63.96 cents, rose to 55.64 British pence from 55.34 pence and gained to 73.29 yen from 72.77 yen.

New Zealand's two-year swap rate fell 2 basis points to 1.97 percent and 10-year swaps fell 4 basis points to 2.42 percent.

BusinessDesk.co.nz

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