Kiwi above 67 US cents as Wheeler quashes talk of big rate cuts

Wednesday 29th July 2015

The New Zealand dollar rose above 67 US cents after Reserve Bank governor Graeme Wheeler said while some easing in monetary policy is likely the economy isn't so weak as to need substantial new stimulus.

The kiwi dollar traded at 66.98 US cents as at 5pm in Wellington, having earlier gained to as high as 67.38 cents, from 66.61 cents late yesterday. The trade-weighted index rose to 71.31 from 70.90.

Wheeler said the kiwi dollar is too high given a deteriorating outlook for New Zealand's external accounts and he expected it to decline. However, the market seized on comments that some forecasters were expecting deeper cuts than were required, and that the economy, growing at 2.5 percent, was being helped by migration, construction and the services sector. Wheeler also expects annual inflation to return to near the mid-point of the bank's 1 to 3 percent band in the first half of 2016.

National Australia Bank, parent of Bank of New Zealand, expects the New Zealand dollar to resume its downward trends, as Wheeler has predicted.

"While we understand the positive NZD reaction to today’s speech . . . in which he decried some of the more extreme market forecasts for the extent to which the OCR could be further cut, Wheeler made clear that further exchange rate depreciation is both required and expected," said Ray Attrill, global co-head of FX strategy at NAB.

The kiwi gained to 91.53 Australian cents from 90.98 cents late yesterday.

Attrill said the New Zealand dollar's gain today "now provides an attractive level to enter a short NZD/AUD position, adding to our short NZD exposure via NZD/USD." That's market jargon for betting on a decline in the kiwi dollar against the Aussie and the greenback.

NAB's short on the kiwi against the greenback is targeting a level of 62 US cents and against the Aussie, it targets 87.72 Australian cents.

Traders are now looking ahead to the US Federal Open Market Committee deliberations, due out tomorrow, which may provide further clues to the timing of rate hikes by the Federal Reserve.

"Our view of tonight’s FOMC meeting outcome is that if the US dollar sells off because the statement fails to put markets more strongly on the scent of a possible September first move, AUD has more potential than NZD to squeeze higher," Attrill said. "If instead the US dollar rallies on some intimation that September is now very much ‘live’, NZD will likely suffer more than AUD, given the extent of the rally since the 23 July RBNZ OCR review."

The kiwi rose to 82.68 yen from 82.33 yen yesterday and gained to 60.58 euro cents from 60.13 cents. The currency rose a little to 42.92 British pence from 42.77 pence and rose to 4.1585 yuan from 4.1485 yuan.

The two year swap rate was little changed at 2.9 percent and 10 year swaps held at about 3.66 percent.

BusinessDesk.co.nz

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