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NZ dollar gains after RBNZ's inflation gauge accelerates at fastest pace since 2011

Tuesday 17th July 2018

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The New Zealand dollar rose across the board after an inflation gauge published by the Reserve Bank accelerated at its fastest pace in seven years, easing concerns about a possible rate cut.  

The kiwi traded at 68.30 US cents as at 5pm in Wellington versus 67.68 cents at 8am and 67.74 cents yesterday. It gained to 91.84 Australian cents from  91.22 cents yesterday.

The local currency was largely unchanged when Statistics New Zealand reported the consumers price index increased a quarterly 0.4 percent in the second quarter while annual inflation was 1.5 percent,  slightly lower than economists' expectations but in line with central bank forecasts. However, it gained later in the session when the Reserve Bank said its quarterly sectoral factor model advanced 1.7 percent quarter on quarter, the strongest since the June 2011 quarter. 

According to the central bank, the model estimates the common component of inflation in the CPI basket, the tradable basket, and the non-tradable basket, based upon separate factors for the tradable and non-tradable sectors. 

"They have said that gauge is one of their prefered measures of core inflation," said Martin Rudings, senior dealer foreign exchange at OMF, adding that the Bloomberg headlines on the data "essentially stopped the US dollar from rising in Asia."

The central bank is mandated with keeping annual inflation between 1-and-3 percent over the medium term, focusing on the mid-point. However, inflation has remained stubbornly weak and the central bank has signalled the official cash rate is likely to remain at a record low 1.75 for some time to come given the lack of inflationary pressure. Markets had moved to price in the possibility of a rate cut on the back of weak data. 

The kiwi also benefited from a softer Australian dollar after the Reserve Bank of Australia's latest minutes highlighted risks around record household debt. 

Rudings said the kiwi could continue to push higher against the Aussie but its move against the greenback may be tempered by Federal Reserve chair Jerome Powell's testimony to the Senate on monetary policy if he continues to be upbeat on the US economy. 

The trade-weighted index climbed to 73.07 from 72.58 and rose to 76.67 yen from 76.17 yen. It gained to 51.55 British pence from 51.14 pence yesterday and to 58.28 euro cents from 57.93 cents. It was at 4.5600 yuan from 4.5314 yuan yesterday.

New Zealand's two-year swap rate lifted 4 basis points to 2.16 percent and 10-year swaps rose 6 basis points to 3.06 percent.


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