Kiwi pushes higher on CPI but profit-taking tempers gains

The New Zealand dollar gained yesterday as investors were cheered by stronger-than-expected inflation data although some profit-taking capped gains.

The kiwi rose to 72.84USc from 72.47USc  as at 8 am in Wellington and 72.44USc late Wednesday. It touched 73.12 after the CPI data was released. The trade-weighted index was at 79.42 from 79.18 after touching a high of 79.76.

On Thursday, government figures showed the consumer price index rose 0.4% in the December quarter for an annual increase of 1.3%. Economists polled by BusinessDesk had been picking a quarterly pace of 0.2% for an annual increase of 1.2%, while the Reserve Bank's own forecast was for consumer prices to rise 0.2% in the December quarter for an annual increase of 1.1%. It marks the first time inflation is back in the central bank's 1% to 3% target band in two years.

"The market was always going to react to the topside if the CPI number was better than expected and that's exactly what it did," ASB head of institutional foreign exchange sales Tim Kelleher said. He said the market has now "completely given up on the idea of a rate cut in New Zealand" and the data was a clear contrast to Australia where the CPI was weaker than expected.

While Westpac Bank acting chief economist Michael Gordon isn't expecting a rate cut, "we don't share the market's enthusiasm for rate hikes," he said in a note. He noted the Reserve Bank's most recent projections suggested that, even if the official cash rate remained at its current level for years to come, inflation wouldn't reach the 2% midpoint of the target until the end of 2018. "The implication is that if interest rates were higher, the inflation undershoot would persist for even longer. We suspect that that assessment won't change in a hurry, especially since the Reserve Bank is once again facing a much stronger New Zealand dollar than it was counting on," said Gordon.

Mr Kelleher noted when the TWI hovered close to 80.00, the move was tempered by some profit taking, in particular in the Kiwi-Aussie cross. He said there could be more upside to come but the kiwi remains contained within recent ranges. Against the greenback, he said the range is 68.50-73.50USc while it is 93.50-97.50Ac against the Aussie.

The kiwi rose to 96.14Ac late Wednesday.

The local currency rose to 5.0099 Chinese yuan from 4.9816 yuan and gained to 67.68 euro cents from 67.50 cents Wednesday. It fell against the pound, trading at 57.59 British pence from 57.80 pence, but picked up against the Japanese yen, rising to ¥82.53 from ¥82.27 24 hours ago.

New Zealand's two-year swap rate rose four basis points to 2.41% while the 10-year swaps rose seven basis points to 3.52%.

(BusinessDesk)