Kiwi at two-week high after OCR stays unchanged

BUSINESSDESK: The New Zealand dollar rose to a two-week high after Reserve Bank governor Graeme Wheeler kept the benchmark rate on hold in his debut review and gave no indication rates will go lower, disappointing traders looking for an easing bias.

The kiwi rose to 82.17 US cents at 5pm in Wellington from 81.59 cents at 8am and 81.26 cents yesterday. The trade-weighted index advanced to 73.35 from 72.58 yesterday.

Mr Wheeler kept the official cash rate on hold at 2.5%, saying the level was appropriate "for now" and citing inflation as something he is keeping close tabs on after the annual consumer prices index slowed to a 0.8% pace, below the central bank's target band.

Economists and traders were split on his debut, with economists unanimous in expecting rates to stay on hold and markets giving a 30% chance of a cut before the announcement.

"Some people think he was 50/50, but the market took it as more hawkish," says Tim Kelleher, head of institutional FX sales NZ at ASB Institutional in Auckland. "The kiwi's had a very strong day on the back of it."

A government sale of $2.5 billion of inflation-indexed bonds yesterday helped drive demand for the kiwi dollar, with buyers having until the end of the month to settle their purchase.

Traders are betting Mr Wheeler will cut the OCR 18 basis points over the coming 12 months, according to the Overnight Index Swap curve, having priced in 27 basis points of reductions yesterday.

The Federal Open Market Committee held the line at its US monetary policy review, having already embarked on an unlimited third round of money printing last month.

The Bank of Canada backed away from a tightening bias after keeping the key lending rate at 1%. Governor Mark Carney says risks to economic growth mean his inclination to hike rates was "less imminent".

The kiwi rose to a three-week high against the Canadian dollar, and traded at 81.56 Canadian cents from 80.49 cents yesterday.

It climbed to 63.34 euro cents from 62.53 cents yesterday, gained to 51.22 British pence from 50.96 pence and advanced to 79.31 Australian cents from 78.73 cents yesterday. It rose to 65.69 yen from 64.88 yen.