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NZD higher on inflation expectations but market waiting for RBNZ

Wednesday 8th August 2018

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The New Zealand dollar rose against the greenback when inflation expectations were a tad stronger but was largely rangebound as investors await tomorrow's central bank rate decision and monetary policy statement.

The kiwi traded at 67.53 US cents at 5pm in Wellington from 67.33 US cents at 8 am and from 67.26 cents late yesterday. The trade-weighted index was at 72.68 from 72.62 yesterday.

The kiwi pushed higher after news that the Reserve Bank's survey of expectations shows firms see the consumers price index reaching 1.86 percent over the coming year, up from 1.80 percent predicted in the June quarter, although still higher than the current 1.5 percent pace. Two-year ahead inflation expectations lifted to 2.04 percent from 2.01 percent, the midpoint of the central bank's 1-to-3 percent target band.

"The reaction was large relative to the relevance of the data and the size of the lift. I suspect it is more of a positioning thing," said ANZ Bank New Zealand senior macro strategist Phil Borkin.

While the central bank is widely expected to keep rates on hold at 1.75 percent tomorrow the statement and the bank's forecasts will be closely scrutinized for any clues about future direction, in particular given signs of emerging inflation. There will be particular interest in whether Governor Adrian Orr continues to indicate the next move could be up or down, depending on how things unfold. 

Mark Johnson, a private client manager at OMF, said the risk is that the central bank "is not as dovish as some people might be expecting and we might see a bit of a relief rally." 

However, while it did push higher on the inflation survey overall investors are "happy to sit on their hands and wait," he said. 

Across the Tasman, Reserve Bank of Australian Governor Philip Lowe essentially ruled out a rate cut. If things unfold as expected "you could expect the next move in interest rates to be up, not down," he told economists in Sydney. If progress is faster any future increase in interest rates is likely to be earlier and slower progress would likely see a longer period without an adjustment. 

The Aussie didn't push higher after Lowe's comments, something Annette Beacher, chief Asia-Pac macro strategist for TD Securities, said was surprising "as the RBA has the hawkish edge." She said, however, investors may be taking some positions off the table ahead of "the wildcard RBNZ Governor Orr tomorrow."  

She said there is a 25 percent chance that Orr will be dovish or hawkish and a 50 percent chance the message will be neutral. 

The kiwi traded at 90.91 Australian from 90.98 cents yesterday.

The kiwi fell to 4.6055 Chinese yuan from 4.6106 yuan yesterday and traded at 75.13 yen from 74.90 yen. It eased to 58.10 euro cents from 58.21 cents yesterday and traded at 52.14 British pence from 51.97 pence.

New Zealand's two-year swap rate was up 1 basis points at 2.10, while 10-year swap rose 2 basis points to 3.01 percent.


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