NZ dollar rises above 73USc with little prospect of rate cut

The New Zealand dollar rose back above 73USc on Friday on speculation the Reserve Bank will hold off on cutting interest rates next week while the Federal Reserve is seen as unlikely to hike US rates, keeping the kiwi's yield advantage intact.

The kiwi rose to 73.06USc as at 5pm in Wellington, from 72.66 cents late Thursday. The trade-weighted index rose to 77.93 from 77.63.

Reserve Bank governor Graeme Wheeler is expected to hold fire from cutting interest rates on September 22, preferring to wait for data that will show whether inflation is picking up before a possible cut at the November 10 monetary policy statement. Traders are currently pricing in an 8% chance of a cut next week and a 70% chance of a cut in November, according to ASB Bank. The central bank is forecasting annual inflation slowed to just 0.2% in the third quarter, while the TWI at close to 78 is well above the 76 average level it projected for the third quarter.

"The NZ dollar has continued to appreciate since the August MPS and remains above the bank's TWI assumed levels, despite these being significantly revised upwards," ASB economist Daniel Snowden said. While inflation pressures are likely to remain weak, "strong economic growth in the first half of 2016 and a nascent rebound in dairy prices are positives."

Mr Snowden expects Mr Wheeler will "again reiterate that further easing may be required" in this week's announcement.

The kiwi has also benefited from weaker US economic data this week which has softened expectations the Federal Reserve will hike interest rates any time soon.

US industrial production fell 0.4% in August, twice as much as economists had expected, while retail sales excluding automobiles fell 0.1% against expectations of a 0.2% gain. The figures added to other weak data recently that has seen traders dial back the probability of rate hikes, with an increase next week given odds of 20% and an increase in December rated a 60% chance.

By contrast, figures this week showed the New Zealand economy grew 0.9% in the second quarter, slower than the market's expectation of 1.1% growth but faster than the central bank's 0.8% forecast. At the same time, first-quarter growth was revised up to 0.9% from 0.7%. The economy expanded 3.6% in the year. Adding to the upbeat sentiment, the ANZ-Roy Morgan consumer confidence index rose to 121 this month from 117.7 in August. A net 31% of respondents expect to be better off financially in a year's time compared to 25% a month earlier.

The local currency was little changed at 97.21Ac from 97.27Ac yesterday and gained to 4.87496 yuan from 4.8456 yuan. It gained to 65.02 euro cents from 64.59 cents and rose to ¥74.55 from ¥74.39. The kiwi gained to 55.20 British pence from 54.81 pence after the Bank of England left its bank rate unchanged at 0.25%.

New Zealand's two-year swap rate fell two basis points to 2.04% and 10-year swaps fell one basis point to 2.59%.

(BusinessDesk)