Dollar gains ahead of RBNZ review, stern warnings likely

Wednesday 10th June 2009

The New Zealand dollar gained ahead of the central bank’s review of monetary policy tomorrow, where Governor Alan Bollard is expected to issue a warning about high long-term interest rates and the currency’s resilience.

Economists are divided over whether the Reserve Bank of New Zealand will hold the official cash rate at 2.5%, or slash it a further 25 basis points, as the kiwi has soared some 17% above the central bank’s forecast average.

Parliament’s Finance & Expenditure select committee yesterday slammed banks for failing to pass on cuts in the OCR, and urged the sector to pass on the cuts in their interest rates for consumers.

The New Zealand dollar gained as the greenback fell after the US Treasury said 10 US banks were granted approval to repay loans from the government under the Troubled Asset Relief Program, stoking appetite for higher-yield, or riskier, assets.

“We predict no change (in the OCR), but expect a stern warning over long-term interest rates,” said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. The select committee’s report “increases the risk of something happening tomorrow as pressure comes” from the Parliament, he said.

The kiwi advanced to 62.69 US cents from 62.03 cents yesterday, and edged up to 61.05 yen from 60.99 yen. It dropped to 78.18 Australian cents from 78.34 cents yesterday, and declined to 44.56 euro cents from 44.64 cents. It increased to 59.37 on the trade-weighted index, or TWI, from 59.22 yesterday.

Kelleher said the currency may trade between 62.25 US cents and 63 cents today as the market prepares for the Governor’s statement tomorrow.

Bollard tried to jawbone long-term interest rates in April when he called them “out of line” with his expectations. His statement immediately pushed the currency down around 1 US cent, but didn’t have a lasting impact.

Bollard told the Parliamentary select committee he wasn’t surprised at the resilience in the kiwi due resurgent equity markets driving investors’ appetite for high yields, but he expects the rise to be temporary. The Reserve Bank also told parliamentarians it hadn’t “intervened in the foreign exchange market in the past two months to counter the appreciation of the dollar.”

Kelleher said the kiwi has to be exceptionally high for the central bank to intervene, and he’s unsure if it’s shown enough strength for Bollard to act.

Businesswire.co.nz

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