The New Zealand dollar fell from a post-float high on a trade-weighted basis ahead of tomorrow's Reserve Bank policy review, which will likely kick off a tightening cycle with a rate hike.
The trade-weighted index rose as high as 79.68, and was at 79.46 at 5pm in Wellington from 79.50 yesterday. The kiwi dollar traded at 84.64 US cents at 5pm from 84.61 cents at 8am, and down from 84.80 cents yesterday.
Traders have priced in a 101 percent chance of a rate hike by Reserve Bank governor Graeme Wheeler tomorrow, according to the Overnight Index Swap curve, which would lift the appeal of the kiwi dollar. Wheeler has previously signalled the official cash rate will have to rise from its record-low 2.5 percent to head of the threat of future inflation, and investors will be gauging the extent and pace of any future hikes. The central bank has kept OCR at 2.5 percent since March 2011 when previous governor Alan Bollard cut the rate in response to the February earthquake that devastated Christchurch.
"What we're not sure about is what comes in the MPS (monetary policy statement) afterwards, and that will be crucial to the market reaction," said Stuart Ive, senior client adviser at OMF in Wellington. "Expectations are higher (for a rate hike) and the downside risk would be the biggest risk with the kiwi."
OMF's Ive said the central bank will be uncomfortable with the strength of the currency. The Reserve Bank projected the TWI would average 77.4 through the March quarter.
New Zealand's relative economic strength has outperformed its peers, with neighbour Australia under pressure from weak Chinese trade weighing on iron ore and copper prices. Traders will be looking at Australian employment numbers tomorrow to see how the economy is tracking. The kiwi rose to 94.48 Australian cents at 5pm in Wellington from 93.94 cents yesterday.
The local currency fell to 87.20 yen at 5pm from 87.57 yen yesterday, and traded at 61.10 euro cents from 61.14 cents yesterday. It was little changed at 50.92 British pence from 50.95 pence yesterday.