Dollar slips on timing of OCR movement

Thursday 15th October 2009

The New Zealand dollar fell against most major currencies, even as global stocks rallied, amid speculation Reserve Bank Governor Alan Bollard may lag behind other central bankers in raising interest rates.

Bollard next reviews the official cash rate on October 29, and is widely expected to keep the rate unchanged at a record low 2.5%.

By contrast, Australia’s central bank unexpectedly raised is key rate a quarter point to 3.25% last week and is seen embarking on a tightening cycle, while even the Federal Reserve has talked of rate hikes when the recession officially ends in the US.

The timing of Bollard’s move has held back the kiwi dollar at a time the Dow Jones Industrial Average has broken through 10,000 points and data has shown the domestic economy is recovering.

“When the RBA moved, people knew the RBNZ wouldn’t go immediately behind but people are starting to think maybe it will now be in the second quarter or beyond,” said Imre Speizer, market strategist at Westpac Banking Corp. “The central bank may lag other banks more than was though a few weeks ago.”

The New Zealand dollar traded at 73.98 US cents from 74.20 cents in late trading yesterday. It earlier fell as low as 73.61 cents. The kiwi fell to 80.79 Australian cents from 81.13 cents and declined to 49.54 euro cents from 49.82 cents.

The local currency bought 66.15 yen, little changed from yesterday. The trade weighted index fell to 66.30 from 66.55.

Investors will be eyeing the release of the Consumer Price Index for the third quarter, which is expected to show annual inflation slowed to a benign 1.2%, below the mid-point of the central bank’s 1% to 3% target band.

Speizer said a key focus will be non-tradable inflation, which is forecast to slip below 3%. Anything higher would be a worrying sign for Bollard, who has warned the country needs to avoid a return to debt-fuelled property investment at the expanse of exports and investment in productive parts of the economy.

Bollard will begin raising interest rates in March, based on Overnight Indexed Swaps, which show the OCR 30 basis points higher that month. By July, the OCR jumped 125 basis points.Speizer said while this month’s Reserve Bank statement will keep rates on hold, there’s a chance Bollard will amend some of the wording around the direction of rates from here.

In the previous two statements, Bollard has said rates will stay “at or below” current levels through until the second half of 2010. He could drop the word “or below” this month, signaling an easing bias is off the table, Speizer said.

Businesswire.co.nz

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