Dollar gains above US70c ahead of 'finely balanced' OCR decision

The New Zealand dollar rose above 70 US cents for the first time in a month ahead of the Reserve Bank's monetary policy statement tomorrow, which is expected to keep rates unchanged though with the market broadly split on whether a cut is on the cards.

The kiwi traded at 69.98 US cents as at 5pm in Wellington, from 69.24 cents late yesterday. The trade-weighted index advanced to 74.33 from 73.75 yesterday.

Traders are pricing in a 37 percent chance that governor Graeme Wheeler will cut the official cash rate a quarter point to 2 percent tomorrow but a cut with the August MPS is odds-on, given the bank's last projections were for at least one more cut. Tomorrow's MPS will be the first revision of the central bank's economic forecasts since the last MPS on March 10 when Wheeler last cut the OCR and since then data has suggested the economy is still growing at a reasonable clip, although with little inflation.

"The balance since March has been net positive," said Imre Speizer, currency strategist at Westpac Banking Corp. "We're running with it being on hold tomorrow and kick the can down the road until August and then cut."

Speizer said Wheeler will have to make clear August is the likely time for a cut or there is a risk the kiwi "will bounce quite hard tomorrow". Such a signal could come from Wheeler hardening his language to words such as "further easing is likely" from "further easing may be required" that he used in March and April, he said.

The US dollar has weakened since US labour market data released on Friday showed employers in the world's largest economy added just 38,000 workers in May, the lowest level since September 2010 and below the 164,000 expected by economists in a Reuters survey. Those figures sapped expectations the Federal Reserve will hike its benchmark interest rate this month. The Reserve Bank of Australia kept its cash rate unchanged at 1.75 percent yesterday.

"You've got the Fed and US data basically conspiring to boost the Aussie and the kiwi against the US dollar with that terrible jobs data," Speizer said. The US payrolls data would probably linger in the market's mind until at least the Federal Open Market Committee meeting on June 15.

The New Zealand dollar rose to 93.81 Australian cents from 93.24 cents yesterday, increased to 61.55 euro cents from 60.96 cents, and gained to 48.10 British pence from 47.66 pence. It rose to 74.92 yen from 74.55 yen and gained to 4.5995 yuan from 4.5492 yuan.

The two-year swap rate rose 5 basis points to 2.27 percent and the 10-year swaps rose 3 basis points to 2.85 percent.

(BusinessDesk)