NZ dollar gains on growing signs Fed will wait longer to raise rates

Monday 12th October 2015

The New Zealand dollar rose amid speculation inflation is tame enough in the US to prevent the Federal Reserve rushing to restore normal monetary conditions, including interest rates of more than zero, which has driven down the greenback.

The kiwi rose to 66.97 US cents at 5 pm in Wellington, from 66.80 cents at the start of the day and from 66.90 cents in New York on Friday. The trade-weighted index was little changed at 71.57 from 71.56.

Minutes of the Federal Open Market Committee's September meeting show officials opted not to raise interest rates last month because of concern inflation would remain at exceptionally low levels. Inflation is one of two measures the Fed watches in assessing the world's biggest economy, along with the labour market, which is showing signs of a return to normality. Through much of this year, investors have pushed back the timing of Fed rate hikes and there is now speculation it might not manage an increase in 2015.

"Everyone is coming to realise there is no inflationary pressure in the US and the numbers don't really stack up for them to raise rates in 2015," said Mitchell McIntyre, a senior corporate dealer at NZ Forex. He said while 67 US cents is a "big level" for the kiwi, "the market seems to have enough momentum to take it a little higher from here."

The New Zealand dollar may trade in a range of 66.70 US cents to 67.40 cents in the next 24 hours, he said.

"Ultimately the Fed is going to raise rates at some point and when they do that, we can expect to see the kiwi start going lower again," McIntyre said. But it is unlikely to chart new lows and may trade in a range of 63 cents to 70 cents longer term.

The kiwi traded at 91.30 Australian cents, from 91.25 cents in New York on Friday and down from 91.69 cents in Asia at the end of last week.

Traders are awaiting New Zealand inflation figures this week, which are expected to confirm increases in consumer prices are well below the level the central bank targets on average, over time. That would give the Reserve Bank room to cut the official cash rate a quarter point to 2.5 percent at its Oct. 29 review, which the overnight interest swap curve puts at 78 percent odds, or at the full monetary policy statement on Dec.10. By contrast, the odds of a Reserve Bank of Australia cut at its next meeting are just 22 percent and that's also the extent of hikes seen to its cash rate in the next 12 months.

The consumers price index fell to 0.2 percent in the third quarter from 0.4 percent three months earlier, according to a Reuters survey. The annual rate may also have slowed to 0.2 percent, the figures scheduled for release next Friday are expected to show. Annual inflation hasn’t been within the central bank’s 1 percent-to-3 percent target range since the third quarter of last year, when it scraped in at 1 percent.

The kiwi fell to 4.2393 yuan from 4.2454 yuan on Friday in New York and traded at 80.48 yen from 80.38 yen. It was little changed at 58.88 euro cents and traded at 43.68 British pence from 43.69 pence.

The two-year swap rate was unchanged at 2.72 percent and 10-year swaps were unchanged at 3.57 percent.

BusinessDesk.co.nz

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