Wednesday 27 April 2016 05:17 PM
NZ dollar gains vs. Aussie on weakest inflation in 7 years, as Fed, RBNZ loom
By Jonathan Underhill
April 27 (BusinessDesk) - The New Zealand dollar rose against its Australian counterpart after Australia posted its
weakest inflation in seven years, sparking speculation of an interest hike across the Tasman just as the market is
preparing for the local Reserve Bank's rate decision.
The kiwi rose to 90.12 Australian cents as at 5pm in Wellington from 88.90 cents before the inflation figures were
released and from 89.16 cents late yesterday. The local currency rose to 68.81 US cents from 68.57 cents yesterday.
Australia's consumer price index fell 0.2 percent in the first quarter, the biggest quarterly decline since December
2008, for an annual gain of 1.3 percent, undershooting market forecasts and raising the possibility that the Reserve
Bank of Australia will cut its cash rate from 2 percent next week. That's an extra wrinkle for bets on the Reserve Bank
of New Zealand, which is expected to wait until June to cut instead of moving tomorrow when its review is due three
hours after the Federal Reserve's latest statement.
"That would add fuel to the fire for the RBNZ tomorrow," said Mark Johnson, senior dealer at OMF. "What the Reserve Bank
has got to figure out is what's the point of waiting. The risk to inflation expectations if they procrastinate would do
more harm than good."
The market has officially priced in just a 35 percent chance of a cut to the official cash rate tomorrow while the
chances of a cut at the full monetary policy statement on June 10 are put at 86 percent. Johnson said governor Graeme
Wheeler may get more impact by cutting tomorrow.
A good outcome for Wheeler would be a relatively hawkish statement from Fed chair Janet Yellen and a cut to the OCR
tomorrow, which would give the kiwi dollar some "good downward momentum" and may help revive inflation in the tradables
sector.
Wheeler is hoping over time to encourage annual inflation back into the bank's 1 percent-to-3 percent band, which it has
been below since the third quarter of 2014. Based on the bank's March projections, inflation will accelerate to 1.1
percent in calendar 2016.
The trade-weighted index rose to 72.67 from 72.59 late yesterday.
The kiwi fell to 47.16 British pence from 47.41 British pence yesterday and dropped to 60.83 euro cents from 61.04
cents. The local currency was little changed at 76.37 yen and slipped to 4.4628 yuan from 4.4656 yuan.
The two-year swap rate was unchanged at 2.20 percent and the 10-year swaps were steady at 2.99 percent.
(BusinessDesk)