NZ dollar sustains rally on labour data ahead of Reserve Bank update

Thursday 8th November 2018

The New Zealand dollar climbed, sustaining its rally after yesterday's unemployment rate data eased bets the central bank will cut interest rates any time soon.

The Reserve Bank is set to release its latest forecasts and policy statement this morning, hot on the heels of yesterday's report showing New Zealand's unemployment rate dropped to the lowest in a decade in the September quarter.

Meanwhile, in the US midterm congressional elections Republicans strengthened their control over the Senate while Democrats took the House, as had been expected.

"Remarkably, it was not the mid-terms that was the big news for kiwi yesterday but the stellar labour market report," ANZ Bank New Zealand economist Miles Workman and senior macro strategist Philip Borkin said in a note. "Kiwi has blown through resistance, and while a still cautious RBNZ may limit the upside today, there is plenty of momentum here now."

The kiwi traded at 67.90 US cents at 830 am in Wellington from 66.39 cents late yesterday. The trade-weighted index was at 73.87 from 73.67.

Analysts will watch closely to see how the Reserve Bank accounts for the stronger-than-expected labour market data that were released less than a day before the central bank’s update due this morning.

"The forecasts would have already been finalised and will already be out of date, but there has been time for the bank to re-write its press release, which forms the opening chapter," Jason Wong, Bank of New Zealand's senior markets strategist, said in a note.

"With inflation now running close to the middle of the target band and the unemployment rate towards the lower edge of its natural (non-inflationary) level, it would certainly come across as less credible if the Bank continued to run the line that it could cut the official cash rate," Wong noted.

"Still, without the smoking gun of higher wage inflation and with core CPI inflation steady at around 1-3/4 percent over the last quarter the Bank is unlikely to be in a rush to tighten policy and might well continue to signal an 'on-hold stance for some time yet," according to Wong.

Others agree the central bank’s tone is set to remain cautious.

"In the context of softening global growth, slipping commodity prices, and heightened risks to the outlook, waiting and watching remains a prudent approach," ANZ’s Workman and Borkin said. "The RBNZ is hardly in a position to declare victory given its focus is primarily on the medium-term. So we expect the RBNZ will leave cuts on the table."

"However, given the current tone of the economic data, we’re not sure the market is going to listen," Workman and Borkin added.

The kiwi traded at 93.24 Australian cents from 93.00 Australian cents.

The New Zealand dollar traded at 51.65 British pence from 51.43 British pence Wednesday. It was at 4.6969 Chinese yuan from 4.5885 yuan and at 76.99 yen from 76.44 yen. It was at 59.28 euro cents from 58.98 cents.

(BusinessDesk)

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