NZ dollar edges up after producer prices foreshadow building inflation pressures

Monday 19th May 2014

The New Zealand dollar edged up in local trading after government figures showed producer prices rose faster than expected, pointing to potential inflationary pressures.

The kiwi rose to 86.33 US cents at 5pm in Wellington from 86.27 cents at 8am, and 86.21 cents on Friday in New York. The trade-weighted index was little changed at 80.26 from 80.18 yesterday.

New Zealand producers faced a 1 percent increase in input prices in the first three months of the year, due to a jump in electricity prices, according to Statistics New Zealand. That was twice the pace investors were expecting, and is seen as a leading indicator of inflation. The Reserve Bank started hiking interest rates in March to head off the threat of looming consumer price rises.

"The PPI (producers price index) was a little bit higher than expected and pulled the kiwi up of its lows," said Michael Johnston, senior dealer at HiFX in Auckland. "The kiwi will fall in the medium term, but in the short-term it's pretty well-bid with New Zealand interest rates attractive relative to elsewhere."

A BusinessDesk survey of 11 traders and strategists predicts the local currency may trade between 85 US cents and 87.40 cents this week. Six predict the kiwi will remain neutral this week, while two pick it to increase and three say it may decline.

HiFX's Johnston said the GlobalDairyTrade auction on Tuesday in the US will be interesting after prices slumped this year, heightening speculation the forecast payout to Fonterra Cooperative Group's farmer shareholders will be cut from a record $8.65 per kilogram of milk solids.

The minutes to the Reserve Bank of Australia's May policy review will be watched tomorrow, with traders gauging the strength of the Australian economy. The kiwi increased to 92.28 Australian cents at 5pm in Wellington from 92.05 cents on Friday in New York.

The local currency gained to 87.61 yen from 87.52 last week, and edged up to 63 euro cents from 62.94 cents. It was little changed at 51.31 British pence from 51.26 pence.

BusinessDesk.co.nz

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