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Dollar extends gains ahead of MPS that may affirm track for rate hikes

New Zealand dollar extended its gains across all major currencies ahead of the Reserve Bank hiking rates for a third time this year, as traders speculate the central bank could be less dovish than the market is pricing. 

The kiwi rose to 85.50 US cents at 5pm in Wellington from 85.21 cents at 8 am and up from around 84.88 cents late yesterday. The trade weighted index traded at 79.79 from 79.54 at the start of the day. 

The Reserve Bank is poised to raise the official cash rate to 3.25 percent tomorrow morning, although opinion is divided on whether governor Graeme Wheeler will affirm the 200 basis points of tightening in two years he projected in March or project a lower track. Traders are betting the central bank will hike rates by about 96 basis points in the next 12 months, implying four quarter-point increases, although Wheeler may pause after tomorrow’s expected uplift.

"There is buying ahead of the anticipated rate hike tomorrow," said Mark Johnson senior client adviser at OMF. "The rhetoric is the important part. Nobody is going to be overly concerned about the rate hike. The market is pricing a 35 percent chance of a rate hike at the July meeting, and maybe that is being a little bit under-priced."

The kiwi extended its three week high against the euro, rising to 63.17 euro cents from 62.91 this morning and from 62.54 cents at 5 pm yesterday. The European Central Bank last week cut its key deposit rate to negative and introduced further stimulus in an attempt to bolster economic growth and ward off the threat of deflation. 

"The interest rate differentials will continue to favour the kiwi - we're hiking and they've just cut rates," Johnson said, referring to the European Central Bank.

The New Zealand dollar traded at 91.08 Australian cents from 90.90 this morning. The kiwi rose to 87.44 yen from 87.21 this morning and edged up to 51.02 British pence from 50.89 at 8am. 

(BusinessDesk)

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Comments and questions
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Can Wheeler and co tell us again how this can be good for NZ?