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NZ dollar gains as central banks meet market expectations, dairy outlook brightens

Thursday 22nd September 2016

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The New Zealand dollar rose after the US Federal Reserve and the Reserve Bank kept interest rates on hold, as expected, keeping the kiwi on track to shed some of its yield advantage later in the year.

The kiwi rose to 73.29 US cents as at 5pm in Wellington from 72.85 cents late yesterday. The trade-weighted index was little changed at 77.78 from 77.79. 

The Federal Open Market Committee kept the federal funds rate unchanged while saying the case for an increase has strengthened and indicating an increase was on the cards later this year. The Fed was followed by the RBNZ, which kept its official cash rate at 2 percent while saying further easing "will be required" to get inflation back up to its target range. Governor Graeme Wheeler reiterated that a weaker exchange rate was needed while adding that its strength "may partly reflect improved export prices". 

"There were no surprises out of the Fed or the Reserve Bank - neither changed interest rates," said Michael Johnston, senior trader at HiFX. "They're inching closer to a rate hike, we're inching closer to a rate cut - it's just a question of when."

Wheeler was "highly likely" to cut the OCR on Nov. 10, the next full monetary policy statement, because the next MPS after that isn't until Feb. 9, he said. Two cuts are probably needed to nudge inflation back up to the RBNZ's 1 percent-to-3 percent range.

New Zealand's two-year swap rate dropped 7 basis points to 2.02 percent, and 10-year swaps dropped 10 basis points to 2.53 percent.

Fonterra Cooperative Group's announcement yesterday that it had raised its forecast payout for the current season by 50 cents/kgMS to $5.25/kgMS, for a total payout of $5.75-to-$5.85, was supportive of the kiwi "at the margin," Johnston said. While up from the 2016 season payout of $4.30 it was "still lower than where they want to be" and the dairy company noted the strong kiwi dollar as a moderating impact when it released its full-year results today.

The kiwi slipped to 73.46 yen from 73.80 yen. It dropped to 95.93 Australian cents from 96.59 cents yesterday and rose to 4.8880 Chinese yuan from 4.8606 yuan. It was little changed at 65.42 euro cents from 65.44 cents yesterday and was little changed at 56.17 British pence from 56.16 pence.

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