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NZ dollar trades near top of recent range

Wednesday 20th January 2010

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The New Zealand dollar held near the top of its recent range ahead of the fourth-quarter Consumer Price Index data which is expected to show inflation is tracking ahead of the central bank’s forecasts and will force Governor Alan Bollard to begin hiking rates earlier than anticipated.  

Economists predict the CPI rose 0.2% in the three months ended December 31, ahead of the 0.2% contraction forecast by the Reserve Bank.

If the data comes in too far ahead of Bollard expectations he will have to tighten the official cash rate earlier than the “middle of 2010” timing he gave at the bank’s last monetary policy statement, which should see the kiwi break above 74 US cents.

The market is betting Bollard will hike interest rates by 200 basis points over the coming 12 months, according to the Overnight Index Swap curve.  

“The kiwi has struggled to get through the 74c figure, and if we get a strong CPI reading today, people will get fired up about the Reserve Bank going sooner rather than later,” boosting the currency, said Chris Tennent-Brown, economist at Commonwealth Bank of Australia.

“If it’s pretty ho-hum, people will maintain their current expectations and the kiwi will stay within its 73 to 74c range.”  

The kiwi was little changed at 73.84 US cents from 73.95 cents yesterday, and rose to 66.93 on the trade-weighted index, from 66.79. It gained to 67.28 yen from 66.87 yen yesterday, and was little changed at 79.90 Australian cents from 79.91 cents. It climbed to 51.66 euro cents from 51.40 cents yesterday, and edged down to 45.12 pence from 45.14 pence.  

Tennent-Brown said the currency may break above 74 US cents if the CPI data is higher than expected, but if falls within the central bank’s expectations and disappoints the market, the kiwi will stay in its current holding pattern.  

“We’ve had regular cracks above 74, but it’s not staying there for too long,” he said.  

The kiwi has climbed above 74 cents twice this month, a level it last reached in November. 

The euro continued to stay under pressure amid ongoing concerns about the state of Greece’s fiscal position, while the German Zew survey of business confidence fell for the fourth straight month.  

Meanwhile, British CPI data was stronger than expected at 0.6% in December from a month earlier, bringing annual inflation to 2.9%, ahead of the 2.6% forecast.  

Chinese Premier Wen Jiabo said the world’s third-largest economy will “carefully manage the pace of lending to reduce financial risks,” while the People’s Bank of China lifted the auction yield on one-year bills for the second straight week as it continues to dampen the surge in bank lending. China will release a slew of data, including gross domestic product, retail sales and CPI, tomorrow.

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