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NZ dollar little changed ahead of MPS which has potential to surprise market

Wednesday 8th November 2017

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The New Zealand dollar was little changed ahead of the central bank monetary policy review tomorrow, despite some economists warning the market may be taken by surprise. 

The kiwi dollar traded at  68.97 US cents as at 5pm, unchanged from 8am in Wellington and down from 69.32 cents late yesterday. The trade-weighted index was at 73.30 from 73.52.

The kiwi came under pressure after a 3.5 percent fall in dairy products in the overnight GlobalDairyTrade auction brought into question whether dairy giant Fonterra Cooperative Group will be able to pay farmers the forecast $6.75 per kilogram of milk solids in the current season. Westpac Banking Corp downgraded its forecast to $6.20/kg MS from $6.50 after the auction as "we expect China’s growth to slow next year as the government focuses on economic rebalancing, which is likely to crimp demand for a range of commodities," it said.  

However, the kiwi barely budged ahead of the central bank's rate review due at 9am tomorrow. All 16 economists polled by Bloomberg predicted rates would remain unchanged at a record low 1.75 percent but there is debate about whether the bank might rejig its forecasts as there are emerging signs of inflation and the dollar is sharply weaker than the bank expected.  

"I would expect they would revise up their inflation forecasts but is that going to be enough to drive the currency higher. It's pretty debatable really," said Mark Johnson,  senior dealer at OMF, adding that the kiwi has strong resistance around the 69.50 US cent level. 

Kiwibank chief economist Zoe Wallis, however, said recent data and political developments will mean the central bank will indicate it plans to lift rates three to six months earlier than its August forecast of around September 2019. "Financial markets appear to be underpricing the risk of a more upbeat RBNZ monetary policy statement," said Wallis in a note earlier this week. 

The kiwi fell to 4.5781 yuan from 4.5915 yuan and declined to 52.37 British pence from 52.60 pence. It fell to 59.47 euro cents from 59.70 cents and dropped to 78.47 yen from 78.97 yen. It traded at 90.19 Australian cents from 90.16 cents yesterday.

Swap rates remained largely rangebound and given that market pricing for rate hikes has been pushed back in recent weeks "we think there is room for an upside surprise on Thursday," said Wallis. 

New Zealand's two-year swap rate was unchanged at 2.19 percent and 10-year swaps fell 1 basis point to 3.12 percent.  


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