Dollar gains on expectation central bank will look through oil impact on inflation

The New Zealand dollar gained on expectation the Reserve Bank will look through the impact of weak crude oil on headline inflation to focus on more-robust core prices and won't use today's consumers price index data as a reason to cut interest rates.

The kiwi rose to 77.05 US cents at 5pm in Wellington, from 76.80 cents at the New York close on Friday. The trade-weighted index rose to 80.19 from 79.80 on Friday.

The consumers price index fell 0.3 percent in the first quarter, less than the central bank's forecast for a 0.4 percent decline. Excluding an 11 percent decline in petrol prices, the CPI would have risen 0.3 percent. Annual inflation of 0.1 percent just beat the RBNZ's estimate of zero. Governor Graeme Wheeler has said the next move in interest rates could be up or down depending on the data flow.

"Without petrol, CPI rose 0.3 percent and that helps explain why the market hasn't sold the New Zealand dollar today," said Stuart Ive, senior dealer at OMF. "The RBNZ was expecting weak numbers based on the drop in oil."

This month alone, crude oil has climbed more than 18 percent, which hasn't yet been felt at a petrol pump or in price data, he said. The direction of the kiwi this week will be determined by offshore events, including US data, after weaker figures last week, and speculation about the timing of Federal Reserve interest rate hikes. Some 71 percent of economists in a Bloomberg survey now expect the Fed to start hiking rates in September, up from 32 percent in March.

The kiwi may trade between 74.50 US cents and 78.60 cents, according to a BusinessDesk survey of 13 currency advisers. Five expect the kiwi could gain, five bet it will fall and three say it will likely remain largely unchanged.

Also helping the kiwi dollar, the People's Bank of China yesterday cut the reserve requirement ratio (RRR) for all banks by 100 basis points from today, allowing banks to reinvest or lend more money. It made larger reductions for specialist banks lending in the agricultural or small business sector. The RRR cut, the second this year, comes after data last week showed the Chinese economy expanded 7 percent in the first quarter, the slowest pace in six years.

The kiwi didn't move much after figures showed the BNZ-BusinessNZ performance of services index increased 1.6 points to 57.6 last month.

The New Zealand dollar rose to 98.72 Australian cents from 98.38 cents on Friday, after touching 98.92 cents over the weekend.

The local currency increased to 51.51 British pence from 51.28 pence on Friday, gained to 91.43 yen from 91.10 yen and rose to 71.50 euro cents from 71.07 cents.,

(BusinessDesk)