NZ dollar holds gains before OCR review

BUSINESSDESK: The New Zealand dollar held gains in local trading ahead of tomorrow's Reserve Bank monetary policy review, which is tipped to keep interest rates on hold, and as investors get more optimistic about a co-ordinated policy response to Europe's deepening debt woes.

The kiwi was little changed at 77.64 US cents at 5pm from 77.63 cents just before 8am, and up from 77.08 cents yesterday. The trade weighted index increased to 70.71 from 70.41 yesterday.

Reserve Bank governor Alan Bollard will keep the official cash rate on hold at a record-low 2.5%, according to a Reuters survey of economists.

Markets are pricing in just 13 basis points of cuts over the coming year, according to the Overnight Index Swap curve, down from 44 basis points earlier this month.

"With the 90-day bank bill rate, I'm expecting a much more flattish profile over the next year, with hikes starting in 2014," said Imre Speizer, market strategist at Westpac Banking. "If Bollard doesn't signal a cut, we might get a slight bounce in the kiwi."

New Zealand's monetary policy statement comes as Europe appears to have settled down after Spain's 100 billion euro bailout for its banking sector and ahead of this weekend's Greek election.

The European Central Bank yesterday backed the establishment of a bank deposit guarantee, strengthening regional supervision of lenders and reducing taxpayer risks from contributions to the finance sector, in its biannual financial stability report review.

"Spain might have caused a sea-change in German thinking," Mr Speizer said. "The expectation of more policy response" has kept markets up.

He said the recent rally in the kiwi may have another few cents to go after a big sell-off last month and is targeting 78.50 to 79.50 US cents.

The New Zealand dollar rose to 62.15 euro cents from 61.78 cents yesterday and climbed to 49.89 pence from 48.75 pence.

It increased to 78.05 Australian cents from 77.90 cents, and advanced to 61.79 yen from 61.41 yen.