Dollar gains on higher inflation expectations; dairy auction looms

The New Zealand dollar gained after the Reserve Bank's survey of inflation expectations showed firms raised their projections for consumer prices in the coming two years, ahead of the latest GlobalDairyTrade auction, which will provide a gauge on the health of the country's biggest export.

The kiwi rose to 74.18 US cents at 5pm in Wellington from 73.73 cents at 8am, and little changed from 74.33 cents yesterday. The trade-weighted index was at 76.38 from 76.29 yesterday.

The local currency rallied after the Reserve Bank's quarterly survey showed firms weren't as downbeat on the inflation outlook as they had been previously, predicting a slightly higher track for rising consumer prices in the two years ahead. Recent steps by the Reserve Bank and government to curb housing demand from investors in Auckland was seen as giving the central bank room to cut rates, and today's survey quelled some of that growing support for easier policy.

"The market got a little bit short ahead of the RBNZ in the last couple of days," said Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. "The kiwi's dropped since Monday morning, and I'm not surprised it's bounced a little bit."

Traders are pricing in a 48 percent chance of a rate cut at next month's monetary policy review according to the Overnight Index Swap curve, though Kelleher said that might be a stretch given the central bank and government's measures to cool housing wouldn't take effect until October.

Government figures today showed producer prices fell in the first quarter, reflecting lower fuel costs and weakness in prices of meat and dairy products.

Traders will be watching the results of the upcoming GlobalDairyTrade auction after the 3.5 percent decline in the last event, taking prices to their lowest level since Dec. 2 last year.

Kelleher said pricing in the futures market indicated a decline at the auction might not be as bad as some are fearing, though dairy farmers will likely remain stretched for the next few months.

New Zealand two-year swap rates slipped to 3.34 at 5pm in Wellington from 3.35 yesterday, and the 10-year swap rate was unchanged at 3.92.

The kiwi increased to 92.81 Australian cents at 5pm in Wellington from 92.66 cents yesterday, and declined to 4.6009 Chinese yuan from 4.6119 yuan. It gained to 65.63 euro cents from 65.02 cents yesterday, and was little changed at 47.31 British pence from 47.27 pence. The local currency traded at 89 yen from 88.93 yen yesterday.

(BusinessDesk)