NZ dollar rallies as strong labour market points to inflation pressure

Wednesday 1st November 2017

The New Zealand dollar rose after the jobless rate fell to a nine-year low in September and wage inflation picked up.

The kiwi traded at 69.08 US cents as at 5pm from 68.42 US cents as at 8am in Wellington and from 68.45 cents late yesterday. The trade-weighted index was at 73.29 from 72.61 yesterday.

The unemployment rate dropped to 4.6 percent in the three months ended Sept. 30 down from 4.8 percent in June, Statistics New Zealand said in its household labour force survey. That's the lowest level since the December 2008 quarter and below the 4.7 percent predicted in a Bloomberg poll of 12 economists. Wage inflation rose a quarterly 0.6 percent and an annual 1.9 percent, marking the highest annual increase since the September 2012 quarter.

"It was a pretty decent lift. I think the market was expecting something strong but probably not that strong and not that broad-based across all metrics," said Ross Weston, a senior trader at Kiwibank. "It becomes a little bit more sensitive on the inflation side of things."

He said some of the kiwi's recovery is because it has fallen so heavily in recent sessions on jitters around the new government and its policies. "It's been a one-way trade for a while, there probably needed to be a bit of a reality check at some point."

Extremely tepid wage inflation is one of the factors that has led the Reserve Bank to signal rates will stay at a record low 1.75 percent until September 2019 at the earliest. However, today's data - coupled with the sharply weaker dollar and pending government policies that are likely to stoke inflation - means it might have to change its forecasts.

Weston said the central bank will have its work cut out for it at its next review. "If they go mildly hawkish and the kiwi rises and they have no inflation again, they end up chasing their tail." He expects they will "heavily caveat" on uncertainty - in particular, given a new central bank governor hasn't been named and the new government will change the Reserve Bank act.

Looking ahead he said the kiwi will also continue to get pushed around by offshore events with markets awaiting an announcement from US President Donald Trump on tax reform as well as a new Federal Reserve chair.

The kiwi rose to 52.03 British pence from 51.84 pence and traded at 59.38 euro cents from 58.83 cents. It rose to 90.10 Australian cents from 89.15 cents, traded at 4.5750 yuan from 4.5359 yuan and gained to 78.64 yen from 77.47 yen.

New Zealand's two-year swap rate rose 2 basis points to 2.16 percent and 10-year swaps rose 5 basis points to 3.17 percent.

(BusinessDesk)

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