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TWI rises to post-float record, raising chances Wheeler will talk down the kiwi tomorrow

The trade-weighted index, which measures the New Zealand dollar relative to the currencies of major trading partners, rose to a post-float record, prompting speculation Reserve Bank governor Graeme Wheeler will try to talk down its value when he announces an interest rate hike tomorrow.

The trade-weighted index jumped as high as 79.68 overnight, up from 79.50 yesterday and surpassing its previous high of 79.67 in April last year. It recently traded at 79.44. The New Zealand dollar slipped to 84.61 US cents at 8am in Wellington from 84.80 cents at 5pm yesterday.

The kiwi has held at elevated levels ahead of the Reserve Bank meeting tomorrow where interest rates are set to start rising on concern a strengthening economy will push up inflation. In recent days, the local currency has gained against its Australian counterpart amid concern Chinese growth and further bond defaults in China weigh on the Aussie.

A higher local currency will concern New Zealand's central bank because it makes the nation's exports less competitive. In its December forecast, the Reserve Bank projected the TWI would average 77.4 in the March quarter.

"There will be some effort to try and talk it down," said Stuart Ive, senior adviser at OMF. "It will certainly be high on their list of concerns, without a doubt, you have an exceptionally elevated currency. It's almost impossible that they will not mention it."

In its December forecast track for the 90-day bank bill rate, seen as a proxy for the OCR, the Reserve Bank projected the rate would increase to 2.7 percent in the March quarter of 2014, rising to 3.8 percent by the end of the year, and 4.8 percent by March 2016.

"At the moment the market is expecting (interest rate hikes) mainly in quick succession at the front end of the curve," said OMF's Ive. "The RBNZ may turn around and say because there are so many uncertainties in the world that it's going to be a very gradual pace, or slower pace, spread over the year."

The central bank's ability to weaken the currency is limited and the current elevated level isn't sustainable over the long term, Ive said.

The New Zealand dollar touched a six-week high of 94.39 Australian cents this morning, and was trading at 94.32 cents at 8am from 93.94 cents at 5pm yesterday. In Australia today, traders will be eyeing the Westpac consumer sentiment survey for March and a report on January home loans.

Australian Reserve Bank deputy governor Philip Lowe is speaking tonight in Sydney on demographics, productivity and innovation, in a session open to media questions.

The local currency slipped to 61 euro cents from 61.14 cents yesterday, dropped to 50.88 British pence from 50.95 pence and declined to 87.06 yen from 87.57 yen.


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Comments and questions

The Reserve Bank have a very tricky balancing act on their hands between the currency value and interest rates. This whole talk of interest rate rises could prove to be more bark than bite. Movements upwards will be small and infrequent, delivered with a few threats of inevitable rises just round the corner. .

Higher interest rates is the only tool to cool the crazy house prices in Auckland. Interest rates should have been put up in January when our currency was not so high.

I quite agree. As a consumer it would have been wonderful to send our dollar sky high in January.

The two 'crisis' areas are Auckland and Christchurch. Christchurch had an earthquake therefore less stock. Auckland has suffered a Chinese 'investor' invasion, billions of foreign dollars flooding in buying up everything in central Auckland. And then we have Wheeler and the Reserve Bank who have no understanding whatsoever of the root causes of either 'crisis' area. Their reaction has been to penalise every Kiwi across the country by introducing an LVR which makes no sense and now on top of that possibly interest rate rises thru a revised OCR. Neither of these knee jerk reactions will make any difference to Auckland or Christchurch. What does it take to have people with a few clues put in charge of our monetary policy? The current lot need to go, they really haven't a clue.

Right on Richard!!! - this is curtains for John Key in the Provinces, Auckland booms because of "economic" Immigrants, as a consequence the OCR goes up tomorrow, The TWI today is pricing in the increase, Who wins? Auckland where the money is spent with cheeper imports and maybe cheeper housing,
Who looses? the Provinces where the money is earnt with less income and yes their all ready low house prices get diven even lower.
How bright is this?
QED Your point Richard - 'What does it take to have people with a few clues put in charge of our monetary policy"

What a dilemma for Wheeler, raising the OCR a little but forcing the TWI over 80 for the 1st time, and with metals taking a pasting, the Ozzie will keep tumbling, we will all be doing our Xmas shopping in Sydney.

I just can't see how they can put rates up ? It's only going to make the $nz stronger and make life harder for Nz export companies ?