NZ dollar gains as RBNZ forecasts show possible earlier rate hike

The New Zealand dollar rose after the Reserve Bank brought forward the timing of a potential rate hike on the back of higher inflation, a weaker currency and fiscal stimulus. Longer-dated swap rates also rose.

The kiwi dollar was trading at 69.52 US cents as at 5pm in Wellington from 69.20 cents at the start of the day and from 68.97 cents late yesterday. The kiwi rose to 90.52 Australian cents from 90.19 cents yesterday.

Acting Reserve Bank governor Grant Spencer kept the official cash rate unchanged at 1.75 percent but the bank's forecasts show the official cash rate rising to 1.9 percent in June 2019, three months earlier than its prior projection. Interest rates are also slightly higher at the end of the forecast period, rising to 2.1 percent in June 2020 versus a prior forecast of 2 percent. The key rate is seen at 2.3 percent in December 2020.

The kiwi rose on the news as "a small move is enough in this case to be a signal," said Westpac Banking Corp senior strategist Imre Speizer. "I would say most of the reaction was on the slight tweaking of the official cash rate track."

Speizer also noted a move in the swap rates but "it wasn't in the short end rates, which are usually the ones that react to monetary policy, but it was in the long end."

New Zealand's two-year swap rate rose 1 basis point to 2.20 percent while 10-year swaps rose six basis points to 3.18 percent.

The central bank's forecast point to a faster pace of tightening toward the end of the forecast period than its prior forecasts, Speizer said. Interest rates are "probably not going to move much in the next two years but in the ensuing few years, between two years and four years out, that's when things are really going to start moving. That's why the longer stuff moved more," he said.

Speizer also noted the central bank spoke a lot about the fiscal stimulus from the new government, which also pushed up the long end given the higher term risk premium "with that extra stimulus they are going to have to borrow a lot of money."

The trade-weighted index increased to 73.82 from 73.30 yesterday. It is now higher than the 73.50 the central bank sees it at from December 2017 to December 2020, a projection some traders say is unrealistic given the changing forces in global financial markets.

The kiwi rose to 4.6102 yuan from 4.5781 yuan and gained to 52.97 British pence from 52.37 pence. It rose to 59.97 euro cents from 59.47 cents and advanced to 79.26 yen from 78.47 yen.

(BusinessDesk)