'Wildcard' Wheeler limits kiwi's gains as Fed tipped to give 'hawkish' statement

Wednesday 27th April 2016

The New Zealand dollar rose, with traders and economists divided on whether Reserve Bank governor Graeme Wheeler will cut interest rates tomorrow, a move that could weaken the kiwi in the face of a Federal Reserve that's expected to signal higher rates.

The kiwi rose to 68.89 US cents as at 8am in Wellington from 68.57 cents late yesterday. The trade-weighted index was almost unchanged at 72.60 from 72.59.

The Federal Open Market Committee's policy meeting is currently underway and officials are expected to make a somewhat hawkish statement tomorrow morning at 6am New Zealand time. Three hours later, the Reserve Bank is scheduled to release its one-page review of the official cash rate and traders say Wheeler will cut the rate to 2 percent either tomorrow or at the full June 10 monetary policy statement. He needs to encourage annual inflation back into the bank's 1 percent-to-3 percent band, which it has been below since the third quarter of 2014. Based on the bank's March projections, inflation will accelerate to 1.1 percent in calendar 2016.

"Trading should be light ahead of tomorrow morning’s doubleheader with the FOMC and RBNZ statements out within a few hours of each other," said Jason Wong, currency strategist at Bank of New Zealand. "The combination of a slightly more hawkish Fed and an RBNZ easing would help take the NZD below 68 (US cents)" although Wheeler "is the wildcard".

Wong says Wheeler needs to act "to over-stimulate the domestic economy to achieve its inflation target" by cutting interest rates or he risks cementing a sub-target inflation outcome for the rest of his tenure and "the history books won’t be kind if that proves to be the case."

The kiwi fell to 47.28 British pence from 47.41 British pence yesterday and was little changed at 61.01 euro cents from 61.04 cents. The local currency rose to 76.70 yen from 76.35 yen and declined to 88.85 Australian cents from 89.11 cents. The kiwi gained to 4.4707 yuan from 4.4656 yuan.

BusinessDesk.co.nz

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