NZ dollar arrests decline after benign 1Q inflation

BUSINESSDESK: The New Zealand dollar pared its decline in the local trading session after government figures showed benign first-quarter inflation, and markets prepare for Spain’s long-dated government bond auction.

The kiwi rose to 81.64 US cents at 5pm from 81.45 cents at 8am, slowing the decline from 82.16 cents yesterday.

The trade weighted index fell to 72.88 from 73.27 yesterday.

New Zealand’s consumers price index rose 0.5% in the three months ended March 31, according to Statistics New Zealand, just short of the 0.6% pace of inflation predicted in a Reuters survey of economists and 0.7%predicted by the Reserve Bank.

The bulk of that increase came from a hike in tobacco excise tax, and stripping out that increase, inflation was 0.2%.

That reinforced expectations the Reserve Bank will be able to keep the official cash rate lower for longer, dimming the yield appeal of New Zealand’s currency.

Traders are betting governor Alan Bollard and his successor will hike the OCR 11 basis points over the coming 12 months from its current 2.5% level, according to the Overnight Index Swap curve.

“At these sorts of levels the Reserve Bank will be pretty comfortable placed,” said Mike Hollows, director of trading at HiFX in Auckland.

“The kiwi dollar has been languishing and we’re not looking forward to the Reserve Bank next week to see how it interprets global conditions and/or the inflation environment.”

Investors are waiting for the outcome on today’s Spanish government bond auction for 2.5 billion euros of two- and 10-year debt.

The yield on Spain’s benchmark 10-year bond fell four basis points to 5.81% ahead of the auction.

The yield spiked above 6% earlier this week amid fears the Mediterranean nation may get caught by a housing bubble that’s put pressure on the country’s banks.

“Spain may have to put up with a higher cost of borrowing,” Mr Hollows said.

France is also looking to raise as much as 11 billion euros in a bond sale today, for securities including 2017 notes and 2018 inflation-linked debt.

The New Zealand dollar fell to 62.25 euro cents from 62.69 cents yesterday, and dropped to 50.94 pence from 51.58 pence.

It declined to 78.80 Australian cents from 79.02 cents yesterday, and decreased to 66.42 yen from 66.86 yen.