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NZ dollar little changed vs. Aussie after RBA refrains from signalling more rate cuts

Tuesday 5th July 2016

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The New Zealand dollar was little changed against its trans-Tasman counterpart after the Reserve Bank of Australia kept interest rates on hold and disappointed some investors expecting the central bank to pave the way for another cut. 

The kiwi traded at 95.81 Australian cents at 5pm in Wellington from 95.83 cents immediately before the release and almost unchanged from yesterday. The trade-weighted index increased to 76.86 from 76.65 yesterday. 

RBA governor Glenn Stevens said the board "judged that holding monetary policy steady would be prudent at this meeting", keeping the target cash rate at 1.75 percent, and saying further information was needed to "allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate". The Australian dollar dipped to 75.08 from 75.21 cents immediately before the release. 

"Markets thought they would get an easing signal and were preparing for an easing in August," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland. "They didn't get the signal, and while that doesn't mean they won't get the cut, there's been no heads up, so that's a disappointment." 

The RBA noted the UK referendum voting in favour of quitting the European Union created more volatility in financial markets, but said it was too soon to determine the impact on global economic activity. The central bank's decision followed the Australian federal election over the weekend, which has yet to be decided with the Australian Electoral Commission counting postal votes. 

New Zealand data today showed businesses recovered their optimism about local economic activity, while separate figures showed house prices continued to accelerate in June. Meantime, Prime Minister John Key said he'd support the Reserve Bank imposing new restrictions on mortgage lending to try and slow the property market. Reserve Bank deputy governor Grant Spencer will deliver a speech on macroprudential policy and housing risk on Thursday evening. 

Westpac's Speizer said traders are pricing in a 55-to-60 percent chance of rate cut next month, and that the currency's strength is posing a bigger problem for the Reserve Bank than the housing market - its two major concerns. The kiwi gained to 71.97 US cents from 71.77 cents yesterday. 

"The currency is the big surprise for them - if it stays here the TWI is 8 percent above their Q3 forecast," he said. 

New Zealand's relatively high interest rates have attracted investors wary of Europe and the UK after the British referendum, and as central banks around the world look set to continue with near-zero policies. The two-year swap rate decreased one basis point to 2.16 percent and 10-year swaps were down three basis points to 2.56 percent.

The local currency increased to 54.32 British pence from 54.02 pence yesterday, and gained to 64.67 euro cents from 64.44 cents. It declined to 73.44 yen from 73.70 yen yesterday and rose to 4.7981 Chinese yuan from 4.7799 yuan.

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