NZ dollar gains as traders split on central banks' direction

Tuesday 26th April 2016

The New Zealand dollar rose, reversing course from an overnight selloff in a sign traders are divided about what they'll learn about the outlook for interest rates from the central banks of Japan, New Zealand and the US this week.

The kiwi rose to 68.75 US cents as at 5pm, in Wellington, from 68.45 cents at the start of the day and from 68.57 cents late yesterday. The trade-weighted index rose to 72.57 from 72.50 at the end of last week.

The Federal Open Market Committee may keep US interest rates on hold on Thursday morning New Zealand time as it continues to evaluate domestic economic data and assess the level of global risk, yet US interest rates rose overnight even in the face of disappointing data amid speculation the Fed may be less concerned about global growth. Here, the Reserve Bank may cut the official cash rate to a record low 2 percent, although the outcome of the local meeting is a close call based on trader bets and the Bank of Japan may also cut interest rates or expand its asset purchase programme.

"The market is wary ahead of these three meetings," said Imre Speizer, a strategist at Westpac Banking Corp. "Through all of that, we might be able to distill a new message. It could go either way and it's not an easy call."

Speizer said it was a week of high risks and "extreme caution is prevailing right now."

Traders are pricing in a 53 percent chance Reserve Bank governor Graeme Wheeler will cut the official cash rate to 2 percent on Thursday to try to spur inflation back within his 1 percent-to-3 percent target band, based on overnight interest swap data compiled by Reuters. Potentially easing some of the tension Wheeler faces when judging whether a rate cut would overheat the nation's bubbling housing market, Prime Minister John Key said his government would consider introducing a land tax on overseas property buyers if data showed they were distorting the housing market.

The kiwi traded at 47.41 British pence from 47.47 pence yesterday and declined to 60.04 euro cents from 60.94 cents. The local currency rose to 76.35 yen from 76.10 yen yesterday and rose to 89.11 Australian cents from 88.97 cents. It increased to 4.4646 Chinese yuan from 4.4567 yuan yesterday.

The two-year swap rate fell about 5 basis points to 2.20 percent and the 10-year swaps were at 2.99 percent.

BusinessDesk.co.nz

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