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Dollar little changed ahead of RBA, BOC reviews

Tuesday 1st June 2010

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The New Zealand dollar was little changed ahead of monetary policy reviews by the Australian and Canadian central banks, which may provide clues to the Reserve Bank of New Zealand's monetary policy statement next week.

Trading was relatively subdued with the US and UK markets closed for public holidays. The RBA is expected to hold its target cash rate at 4.5%, and investors will be looking to see whether Governor Glenn Stevens will talk up the strength of the economy and inflationary pressures.

The Bank of Canada is forecast to hike its target for the overnight rate to 0.5% after Governor Mark Carney said in April the bank will raise rates in response to unexpectedly strong domestic growth. Canada's economy grew at its strongest pace in a decade, with annualised growth of 6.1% in the three months through March. The kiwi fell 0.8% to 71.02 Canadian cents. 

The New Zealand and Canadian economies share enough similarities that the BoC's decision "could be regarded as a canary in a coalmine for the RBNZ," said Imre Speizer, markets strategist at Westpac Banking Corp.

"If they don't go, it would be stronger guidance that the Reserve Bank doesn't move" than if it does hike rates,  he said.

"There's potential for the kiwi to break up on the topside if the Bank of Canada lifts rates."  

The kiwi fell to 68.15 US cents from 68.21 cents yesterday, and declined to 66.15 on the trade-weighted index of major trading partners' currencies from 66.27. It dropped to 62.18 yen from 62.44 yen yesterday, and slipped to 80.48 Australian from 80.54 cents. It retreated to 55.39 euro cents from 55.46 cents yesterday, and was down to 46.88 pence from 47.10 pence.  

Speizer said the currency may trade between 67.40 US cents and 68.40 cents today, in what will be a very busy 24-hour period, which will see the Australian and Canadian central banks review their cash rates, while Fonterra Cooperative Group will hold its online milk powder auction. 

Reserve Bank Governor Alan Bollard is expected to hike the official cash rate 25 basis points next week to 2.75% as the local economy recovers on faster than expected export growth.

National Bank economists said business confidence was still high, and a net 79% of firms expected higher interest rates in the next 12 months, according to the lender's monthly survey. Investors are betting Bollard will hike the OCR 161 basis points over the coming year, according to the Overnight Interest Swap curve.  

Fonterra will hold its globalDairyTrade auction today in the US, and prices are expected to pull back from their two-year highs.

Whole milkpowder prices have more than doubled from a trough last July, underpinning New Zealand's export recovery, and last week the world's biggest dairy exporter boosted its forecast pay-out to farmers.

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