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NZ dollar surges after the Reserve Bank signals interest rates are headed up

Friday 26th July 2013

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The New Zealand dollar surged after the central bank yesterday signalled interest rate hikes were on the horizon, increasing the lure of local assets.

The kiwi rose to a six-week high of 81 US cents, and recently traded at 80.95 cents, from 79.80 cents at the 5pm market close in Wellington yesterday. The local currency surged to a four-and-a-half year high of 87.74 Australian cents, and recently traded at 87.23 cents, from 87.14 cents yesterday.

New Zealand Reserve Bank governor Graeme Wheeler kept the benchmark rate at a record low 2.5 percent at the six-weekly official cash rate review yesterday and said that monetary stimulus will likely be needed in the future, citing upward pressures to inflation from a construction and housing boom.

"The Reserve Bank has explicitly shifted its guidance to a tightening one, that is the first time we have seen this explicit tightening bias stated in words," said Imre Speizer, senior currency strategist at Westpac Banking Corp. "It was quite hawkish. That was a surprise to pretty much everybody in the market."

US dollar weakness is also supporting a higher kiwi after a US report on core durable goods failed to meet expectations, suggesting GDP forecasts would be revised downwards, said Westpac's Speizer.

The New Zealand dollar has gained 9.8 percent against the Australian dollar so far this year as weakness in the Australian economy points to lower interest rates while a revival in New Zealand signals rates are going higher.

Traders have priced in 56 basis points of hikes by New Zealand's central bank over the next 12 months, while in Australia they expect 39 basis points of cuts, according to the Overnight Index Swap curve.

The local currency rose as high 60.99 euro cents from 60.41 cents yesterday, and rose to as high as 52.65 British pence from 52.03 pence, a two-week high versus both currencies. It gained to as much as 80.43 yen, a seven-week high, from 79.81 yen. The trade-weighted index jumped to an eight-week high of 76.23, and was recently at 76.13 from 75.57 yesterday.

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