NZ dollar slides as Fed bolsters bets on December hike

Friday 9th November 2018

The kiwi declined as the US Federal Reserve underpinned bets it will raise interest rates next month at a time when the Reserve Bank flagged New Zealand rates are likely to remain steady.

After a two-day meeting in Washington, the US Federal Open Market Committee held its target range for the federal funds rate steady at 2 to 2-1/4 percent.

"The labour market has continued to strengthen and ... economic activity has been rising at a strong rate" since the FOMC’s last meeting in September, it said in a statement, adding that it expects "further gradual increases" in the target range for the fed funds rate.

The kiwi traded at 67.61 US cents at 8.36am in Wellington, extending its earlier fall after the Fed released its statement, from 67.88 cents late yesterday. The trade-weighted index was at 73.64 from 73.87.

“As universally anticipated, the Fed left rates on hold today and there was nothing in the policy statement to suggest that officials are wavering from their plans to hike interest rates again in December," Michael Pearce, senior US economist at Capital Economics, said in a note.

“Attention was focused on the minor change to the post-meeting statement which, if anything, was slightly dovish,” Pearce noted. “Business fixed investment growth, which was previously described as ‘strong’, was noted as having ‘moderated from its rapid pace earlier in the year’, a nod to the sharp slowdown in investment revealed in the third quarter GDP figures.”

“But with job gains and overall economic activity still described as growing at a ‘strong’ rate and inflation in line with its target, this will not be enough to stop the Fed hiking,” concluded Pearce.

The Fed’s statement came a day after Reserve Bank governor Adrian Orr held the official cash rate at 1.75 percent, saying the central bank still expects to keep it at this level into 2020.

While the Reserve Bank bank's press release omitted a line from the previous statement that its next move could be "up or down," Orr said "there are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent."

Even so, economists and traders are betting the next Reserve Bank move will be a hike.

“While the bank wasn’t ready ... to admit an explicit tightening bias, the numbers are clear for all to see,” Jason Wong, Bank of New Zealand's senior markets strategist, said in a note.

“The market has recently been pricing out rate cuts from the OIS (overnight indexed swap) curve and factoring in the chance of rate hikes as soon as the second half of next year, in anticipation of an eventual capitulation by the bank, and we concur with that view,” Wong said.

The kiwi traded at 93.04 Australian cents from 93.28 cents yesterday.

The New Zealand dollar traded at 51.72 British pence from 51.67 pence yesterday, and was steady at 59.40 euro cents. It was at 4.6783 Chinese yuan from 4.7007 yuan and at 77 yen from 77.04 yen.

(BusinessDesk)

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