NZ dollar retreats on risk sentiment after touching 11-month high following interest rate hike

Friday 14th March 2014

The New Zealand dollar touched an 11-month high after the Reserve Bank raised interest rates and signalled more hikes ahead, before the currency retreated on concern about escalating tensions in the Ukraine and slower than expected growth in China.

The kiwi hit 86.06 US cents early this morning, its highest level since April last year, and was trading lower at 85.23 cents at 8am in Wellington from 85.61 cents at 5pm yesterday. The trade-weighted index, which measures the kiwi against the currencies of New Zealand's main trading partners, touched a new post-float high of 80.29, and was trading at 79.71 at 8am from 80.04 yesterday.

The New Zealand dollar eased from its highs as investors favoured safe-haven assets on concern about escalating tensions in the Ukraine as Russia amassed troops near the border and US secretary of state John Kerry signalled western countries may respond should a referendum in the Crimea region go ahead on Sunday. Weaker-than-expected Chinese industrial output and retail sales data also weighed.

"A generally risk off session overnight, with concerns over the Chinese outlook and tensions in the Ukraine weighing on sentiment," ANZ Bank senior economist Mark Smith and senior FX strategist Sam Tuck said in a note. "Further NZD gains will be difficult."

The kiwi is likely to trade between 85 US cents and 86 US cents today, according to ANZ.

The New Zealand dollar fell to 86.62 yen at 8am in Wellington from 87.94 yen at 5pm yesterday amid a surge in demand for the safe-haven Japanese currency. Today, the Bank of Japan publishes the minutes of its February meeting at 12:50pm New Zealand time.

New Zealand's central bank yesterday lifted the official cash rate a quarter-point to 2.75 percent, and signalled it will probably hike a further 1 to 1.25 percentage points this year on concern about looming inflation as economic growth accelerates. While markets were prepared for the rate hike, the path of the 90-day bank bill rate, seen as a proxy for the key rate, indicated rates will rise above 5 percent in 2017, about half a percentage point more than what traders were expecting

Reserve Bank assistant governor John McDermott told Radio New Zealand this morning that a series of moderate increases now is preferable to large increases next year.

In New Zealand today, traders will be eyeing the BNZ-BusinessNZ PMI manufacturing report for February at 10:30am to see if recent strength has continued.

The kiwi was little changed at 94.46 Australian cents from 94.41 cents yesterday following better than expected Australian employment data. The local currency slipped to 61.49 euro cents from 61.57 cents yesterday and weakened to 51.29 British pence from 51.48 pence.

BusinessDesk.co.nz

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