NZ dollar holds above 88 US cts before Yellen testimony, CPI

Monday 14th July 2014

The New Zealand dollar held above 88 US cents as traders weighed the prospects that Federal Reserve chair Janet Yellen will this week say the world's biggest economy needs stimulus for longer, weakening the greenback and driving demand for higher-yielding currencies.

The kiwi traded at 88.14 US cents at 5pm in Wellington, little changed from the start of the day and from the close of trading in New York on Friday. The trade-weighted index was little changed at 81.92, close to its all-time high. The kiwi may test its post-float high of 88.42 US cents this week, according to a BusinessDesk survey.

Yellen is scheduled to deliver her semi-annual policy testimony to the Senate Banking Committee on Tuesday in the US, and the next day to the House Financial Services Committee, having previously indicated the Fed isn't in any rush to start raising interest rates, even while trimming its bond buying programme. If she again signals the Fed won't hurry to raise rates from near zero it may drive investors to currencies such as the kiwi dollar, which offer higher interest rates. New Zealand inflation data this week, meantime, is expected to keep the Reserve Bank on track to hike interest rates this month.

"If Yellen comes out with a comment that implies the first fed funds rate hike might not be until the second half of next year, we'll probably see US dollar weakness and in the hunt for yield, the kiwi may try at that high," said Peter Cavanaugh, client adviser at Bancorp Treasury Services. If New Zealand CPI then prints strongly, "it's like pushing the afterburners."

The Reserve Bank will be uncomfortable with the TWI near record levels, especially with prices of commodity exports having tumbled this year, he said. Still, "there's a hunger for yield because there's so much free cash lying around the world."

Second-quarter inflation figures due on Wednesday are expected to show the consumer price index rose to 0.4 percent in the second quarter for an annual pace of 1.8 percent, according to a Reuters survey. That's closer to the mid-point of the 1 percent-to-3 percent range that the Reserve Bank targets and would keep intact expectations that governor Graeme Wheeler will raise the official cash rate to 3.5 percent this month.

The local currency traded at 64.78 euro cents from 64.73 cents at the start of the day, little changed from the New York close. The kiwi was little changed at 51.50 British pence. The New Zealand dollar was little changed at 93.79 Australian cents and traded at 89.38 yen.

BusinessDesk.co.nz

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