NZ dollar strengthens after RBNZ signals 2014 rate rise

NZ dollar strengthens after central bank signals inflationary pressures likely to push up rates

By Tina Morrison

July 26 (BusinessDesk) – The New Zealand dollar strengthened after the central bank signalled that inflationary pressures from housing and construction are likely to push up interest rates.

The kiwi rose to a six-week high of 81.06 US cents and was at 80.79 cents at the 5pm market close in Wellington, from 79.80 cents yesterday. The trade-weighted index jumped to 76.03 from 75.57 yesterday.

Reserve Bank governor Graeme Wheeler yesterday kept the benchmark interest rate at a record low 2.5 percent. Strategists say his accompanying statement was more hawkish, calling the local currency “high” rather than “overvalued”, and saying the removal of monetary stimulus would likely be needed in the future because of inflation pressures from a construction and housing boom.

“The Reserve Bank is getting more and more concerned about inflationary pressures coming out of housing and coming out of construction,” said Derek Rankin, a director at Rankin Treasury Advisory. “If the inflation numbers do start to work their way higher then the Reserve Bank will need to lean against that by looking at raising interest rates. The response from the market has been to bring forward the time when the Reserve Bank may be forced to start to raise rates.”

Traders have priced in 56 basis points of hikes by New Zealand’s central bank over the next 12 months, according to the Overnight Index Swap Curve.

The New Zealand dollar is likely to encounter resistance at 81.60 US cents, Rankin said.

“The market seems to be interested in buying the New Zealand dollar pretty much across the board,” he said. ”The New Zealand economy is a bit ahead of everywhere really; our economy is performing quite well.”

The New Zealand dollar has gained 9.6 percent against the Australian dollar so far this year as weakness in the Australian economy points to lower interest rates while a revival in New Zealand signals rates are going higher.

In Australia, traders are pricing in 36 basis points of cuts by the central bank over the next 12 months, according to the Overnight Index Swap Curve.

The local currency surged to a four-and-a-half year high of 87.74 Australian cents, and was at 87.21 cents at the 5pm market close in Wellington, from 87.14 cents yesterday.

“Up here is very good levels for importers to add to cover, but it is tough for exporters,” Rankin said.

The New Zealand dollar rose to 60.84 euro cents from 60.41 cents yesterday and gained to 52.49 British pence from 52.03 pence. The kiwi inched up to 79.88 yen from 79.81 yen.

(BusinessDesk)

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