NZ dollar rises above 73 US cents with little prospect of rate cut next week

Friday 16th September 2016

The New Zealand dollar rose back above 73 US cents on speculation the Reserve Bank will hold off on cutting interest rates next week while the Federal Reserve is seen as unlikely to hike US rates, keeping the kiwi's yield advantage intact.

The kiwi rose to 73.06 US cents as at 5pm in Wellington, from 72.66 cents late yesterday. The trade-weighted index rose to 77.93 from 77.63.

RBNZ governor Graeme Wheeler is expected to hold fire from cutting interest rates on Sept. 22, preferring to wait for data that will show whether inflation is picking up before a possible cut at the Nov. 10 monetary policy statement. Traders are currently pricing in an 8 percent chance of a cut next week and a 70 percent chance of a cut in November, according to ASB Bank. The central bank is forecasting annual inflation slowed to just 0.2 percent in the third quarter, while the TWI at close to 78 is well above the 76 average level it projected for the third quarter.

"The NZD has continued to appreciate since the August MPS and remains above the bank’s TWI assumed levels, despite these being significantly revised upwards," said ASB economist Daniel Snowden. While inflation pressures are likely to remain weak, "strong economic growth in the first half of 2016 and a nascent rebound in dairy prices are positives".

Snowden expects Wheeler will "again reiterate that further easing may be required” in next week's announcement.

The kiwi has also benefited from weaker US economic data this week which has softened expectations the Federal Reserve will hike interest rates any time soon.

US industrial production fell 0.4 percent in August, twice as much as economists had expected, while retail sales excluding automobiles fell 0.1 percent against expectations of a 0.2 percent gain. The figures added to other weak data recently that has seen traders dial back the probability of rate hikes, with an increase next week given odds of 20 percent and an increase in December rated a 60 percent chance.

By contrast, figures this week showed the New Zealand economy grew 0.9 percent in the second quarter, slower than the market's expectation of 1.1 percent growth but faster than the central bank's 0.8 percent forecast. At the same time, first-quarter growth was revised up to 0.9 percent from 0.7 percent. The economy expanded 3.6 percent in the year. Adding to the upbeat sentiment, the ANZ-Roy Morgan consumer confidence index rose to 121 this month from 117.7 in August. A net 31 percent of respondents expect to be better off financially in a year’s time compared to 25 percent a month earlier.

The local currency was little changed at 97.21 Australian cents from 97.27 cents yesterday and gained to 4.87496 yuan from 4.8456 yuan. It gained to 65.02 euro cents from 64.59 cents and rose to 74.55 yen from 74.39 yen. The kiwi gained to 55.20 British pence from 54.81 pence after the Bank of England left its bank rate unchanged at 0.25 percent.

New Zealand's two-year swap rate fell 2 basis points to 2.04 percent and 10-year swaps fell 1 basis point to 2.59 percent.

BusinessDesk.co.nz

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