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NZ dollar TWI heads for 1.7% weekly gain as rate cut bets pared back; US jobs report looms

Friday 8th July 2016

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The New Zealand dollar is heading for a 1.7 percent gain on a trade-weighted basis as economists pulled back their expectations for another interest rate cut after the Reserve Bank disappointed some in the market anticipating new tools would be rolled out sooner to cool the housing market. 

The trad-weighted index rose to 77.61 at 5pm in Wellington from 76.30 last week and was up from 76.72 yesterday. That's the highest level since May last year and well above the Reserve Bank's 71.6 projected average for the third quarter. Two-year swap rates rose 4 basis points to 2.22 percent, and 10-year swaps were up 1 basis point to 2.49 percent. 

ANZ Bank New Zealand changed its call for next month's policy review, picking the Reserve Bank will keep the official cash rate at 2.25 percent after deputy governor Grant Spencer said yesterday that new macroprudential tools are being looked at, and there could be an extension to investor-based limits across the country by the end of the year. Some commentators were expecting Spencer's speech to announce new policy, including Prime Minister John Key who today said the central bank didn't need to wait six months to act. 

"I was surprised by the reaction of the currency to the RBNZ last night - I didn't think they'd announce anything and they didn't" and ASB is still picking a cut in August, said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional. "The TWI's heading up to 78, and anything with an 80-handle would look unjustifiable and unsustainable and you might get some RBNZ action if you're not careful." 

The kiwi is heading for a 1.2 percent weekly gain against the greenback, trading at 72.54 US cents at 5pm in Wellington from 71.50 cents yesterday. ASB's Kelleher said the June non-farm payrolls report in Washington will be key with global investors backing safe-haven assets such as gold, silver and US Treasuries. If the jobs report shows growing employment in the world's biggest economy, that could alter expectations for US interest rates, which investors are picking to stay on hold until 2018.

"There's extreme bullish sentiment in gold, silver and US bonds," Kelleher said. "If we get a reasonable non-farm payrolls, that could end up pretty nasty with US dollar strengthening and the kiwi and Aussie going lower." 

The local currency rose to 96.73 Australian cents from 95.28 cents yesterday after Standard & Poor's put Australia's credit rating outlook on 'negative', meaning there was chance its AAA rating could be lowered. 

The kiwi climbed to 4.8488 Chinese yuan from 4.7674 yuan yesterday and advanced to 72.83 yen from 72.61 yen. It rose to 56.02 British pence from 54.78 pence yesterday and increased to 65.45 euro cents from 64.49 cents.

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