Kiwi gains ahead of RBNZ rates review

Monday 26th July 2010

The New Zealand dollar advanced after the results of stress tests of European banks failed to rattle investors and ahead of the central bank’s interest rate review on Thursday which is expected to see a further hike in the official cash rate.

Just seven of the 91 banks failed the stress tests, according to EU regulators, with those needing a combined 3.5 billion euros to bolster their finances. Still, the results provoked concern the tests weren’t tough enough to show up systemic weakness.

Shares on Wall Street ended up higher on Friday in New York after strong earnings from companies including Microsoft and Ford and a report showing business sentiment in Germany rose this month. Traders will be watching Thursday’s RBNZ statement for signs the central bank has become less upbeat about the outlook.

The OCR decisions “will hog most of the limelight” this week, which will likely “portray a maintained tightening bias,” Mike Jones, currency strategist at Bank of New Zealand, said in a report.

He said expectations of RBNZ action “should limit dips” in the kiwi to around 71 US cents this week. The kiwi dollar traded at 72.70 cents this morning, up from 72.40 cents in New York on Friday.

The New Zealand dollar traded at 56.31 euro cents from 56.36 cents on Friday, with the euro strengthening against the greenback after the bank stress tests.

The kiwi traded at 81.17 Australian cents from 81.22 cents on Friday and gained to 63.57 yen from 63.35 yen. The local currency bought 47.09 British pence from 47.46 pence on Friday. The trade-weighted index was at 68.11 from 68.12.

Reserve Bank Governor Alan Bollard will raise the OCR a quarter point to 3% on Thursday, according to all 20 economists in a Reuters survey.

He is expected to keep increasing the OCR until it reaches a ‘normalised’ level of around 5% though the extent and pace of tightening may be tempered by weaker economic data than Bollard was forecasting in the monetary policy statement last month.

On Wednesday, Australia releases the consumer price index for the second quarter. Inflation probably accelerated to 1% in the quarter from 0.9%, for an annual rate of 3.4%. The inflation data will help traders gauge the timing of further rate hikes across the Tasman.

Minutes of the July 6 meeting of the Reserve Bank of Australia, where the cash rate was held unchanged at 4.5%, show policymakers planned to pay close attention to the European bank stress tests and the pace of economic growth in the region in deciding on further rate increases.

Businesswire.co.nz

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