Wednesday 10th May 2017
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The New Zealand dollar was little changed near 69 US cents ahead of the Reserve Bank's monetary policy review tomorrow, where Reserve Bank governor Graeme Wheeler may bring forward the track of interest rate hikes.
The kiwi traded at 69.01 US cents as at 5pm in Wellington from 68.95 cents at 8am and 69.02 cents yesterday. The trade-weighted index was little changed at 75.40 from 75.36.
Wheeler is expected to keep the official cash rate at 1.75 percent at tomorrow's policy review, however building inflation expectations and a bigger pick-up in consumer prices than anticipated has some economists predicting he'll bring forward future increases to 2018. At the February policy statement, Wheeler said rates could go either way in the future with the looming prospect of new trade barriers creating too many uncertainties for the central bank. Election outcomes and military posturing had investors on edge earlier this year, but since Emmanuel Macron's decisive victory in the French presidential vote this week Wall Street's 'fear gauge', the Chicago Board Options Exchange's volatility index, has dropped near 25-year lows.
"The market's mixed on whether the Reserve Bank's statement is going to recognise some of the better data we've had and bring the OCR track from 2019 to late 2018," said Martin Rudings, senior dealer foreign exchange at OMF in Wellington. "I don't think the market's willing to take too many risks going into it."
Ruding's personal view is that Wheeler will stick to his current track, looking through the one-off inflationary boosts from the first quarter, with growing trade protectionism still a threat. If that happens, he expects the kiwi will fall against the Australian dollar, which has been languishing in recent days with weak iron ore prices and disappointing economic data. The kiwi edged down to 93.70 Australian cents from 93.80 cents yesterday.
The prospect of higher US interest rates is still the dominant theme for Rudings, with two more interest rate hikes expected from the Federal Reserve, which would reduce the yield appeal of the antipodean currencies, which have been favourites among investors for the 'carry trade', where funds are borrowed in low interest rate currencies to buy higher-yielding assets. The yield on New Zealand's 10-year government bond was recently at 3.09 percent, 70 basis points above its US counterpart, compared to 105 basis points a year earlier.
New Zealand's two-year swap rate was unchanged at 2.34 percent, and 10-year swaps slipped 2 basis points to 3.42 percent.
The kiwi declined to 4.7627 Chinese yuan from 4.7662 yuan yesterday, after figures showed annual consumer price inflation accelerated last month in China. The local currency rose to 78.51 yen from 78.17 yen yesterday, and increased to 63.35 euro cents from 63.11 cents. It was unchanged at 53.28 British pence.
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