Dollar jumps after Reserve Bank raises rates, keeps future hikes intact

The New Zealand dollar jumped three quarters of a US cent after the Reserve Bank raised its benchmark interest rate today and signalled rates would continue to rise broadly as it outlined in March, surprising some traders who had expected it to pull back its future track to reflect weaker commodity prices.

The kiwi touched a three-week high of 86.27 US cents, from 85.50 cents immediately before the Reserve Bank's 9am monetary policy statement. The local currency was recently trading at 86.10 US cents.

Reserve Bank governor Graeme Wheeler today raised the official cash rate by 25 basis points to 3.25 percent and signalled there would be no pause in the bank's tightening cycle as he moves policy back to more neutral levels in an attempt to ward off higher inflation. The 90-day bank bill rate, seen as a proxy for the OCR, is projected to be 4 percent by year-end, unchanged from the March MPS. By the end of 2015, the central bank sees the 90-day bank bills at 4.7 percent, little changed from the 4.9 percent rate it saw in March.

"The kiwi has had a big spike against the US dollar," said Stuart Ive, senior advisor at OMF. "The market was expecting Wheeler to be slightly more dovish on his approach and maybe even reduce the bank bill track significantly and that basically didn't happen. That makes it very clear from Wheeler that we are going to continue raising rates on the current track that we are on until he believes that we are in a more neutral stance given inflation."

The central bank sees annual inflation breaking through the mid-point of its 1 percent-to-3 percent target range in the June quarter of 2015, at 2.1 percent, three months earlier than was projected in the March MPS, before slipping back to 1.9 percent.

The kiwi faces resistance at 86.50 US cents as the greenback is underpinned by an improving US economy, and traders would need to see weaker data on US retail sales tonight to break through that level, Ive said.

The biggest revisions to the bank's forecasts are for the track of the trade-weighted index, which was recently at 80.31 from 79.56 immediately before today's MPS and 79.97 at the time of the last MPS on March 13. The central bank expects the TWI to average 80 in the June quarter, up from its March projection of 78.4, and hold above 79 through 2014, before declining in 2015.

"The RBNZ have raised significantly the TWI track," said OMF's Ive. "They probably had to as we are clearly on a different path to the majority of the rest of the world."

The New Zealand dollar also spiked higher against the Australian dollar following today's MPS. The local currency touched a two-week high of 91.80 Australian cents, from 91.14 cents immediately before the 9am announcement, and was recently trading at 91.75 cents.

"We have two very different economies and two very different central bank approaches at the moment," said OMF's Ive. "We are in a hiking cycle and the RBA are clearly on the fence."

The kiwi faces resistance at 92.10 Australian cents, Ive said.

The local currency jumped to a one-year high of 63.74 euro cents, from 63.18 cents before the statement and was recently trading at 63.60 cents. It rose to a three-week high of 51.38 British pence from 50.93 pence before the MPS and was recently trading at 51.26 pence. The kiwi rose to a four-week high of 87.99 yen from 87.27 yen before the MPS and was recently at 87.78 yen.

(BusinessDesk)