NZ dollar gains vs. British pound as lower BoE wage forecast pulls back rate bets

Thursday 14th August 2014

The New Zealand dollar rose to a three-week high against the British pound after the Bank of England lowered its estimate for wage growth, prompting investors to push out expectations for higher interest rates.

The kiwi touched 50.72 British pence overnight and was trading at 50.66 pence at 8am in Wellington, from 50.13 pence at 5pm yesterday. The local currency advanced to 84.56 US cents from 84.26 cents yesterday.

Sterling tumbled after the BoE cut its estimate for 2014 wage growth in its quarterly inflation report to 1.25 percent from a May forecast of 2.5 percent, with governor Mark Carney noting both wage and productivity gains were "disappointing". That suggests the UK central bank will maintain its accommodative monetary policy for longer than traders had expected, increasing the yield advantage of New Zealand, where governor Graeme Wheeler has a tightening bias.

"Carney's emphasis on wage growth clearly indicates that the BoE is not yet ready to consider rate hikes as it sees inflationary pressures non-existent and is far more concerned about sustaining growth going forward," Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York, said in a note. "As long as wage growth remains subdued, the BoE is likely to keep rates stationary and that suggests further downside pressure on the pound."

The BoE kept its benchmark interest rate at a record low 0.5 percent last week, with minutes of the meeting scheduled for release on Aug. 20. New Zealand interest rates are expected to resume their upward path next year following a "period of assessment" after the central bank last month raised the rate at its fourth consecutive meeting to 3.5 percent.

In New Zealand today, the focus will be on second quarter retail sales data. Retail sale volumes are expected to rise 1 percent from the previous quarter, while the value of sales will probably increase 3.4 percent from the year ago quarter, according to economists polled by Reuters. The data is released at 10:45am.

Traders will also be eyeing the BNZ-BusinessNZ Performance of Manufacturing Index for July at 10:30am, for a gauge on demand and inflationary pressures in the local economy.

The New Zealand dollar edged up to 90.87 Australian cents from 90.77 cents yesterday, gained to 63.27 euro cents from 63.05 cents and advanced to 86.61 yen from 86.18 yen. The trade-weighted index rose to 79.35 from 79.06 yesterday.

BusinessDesk.co.nz

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