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New Zealand dollar climbs after RBNZ wrong-foots doves, Aussie off lows

Tuesday, August 23, 2016 - 12:03
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The New Zealand dollar rallied on Tuesday after the country's central bank disappointed doves with a forecast of smaller rate cuts than some had been expecting.

[SYDNEY] The New Zealand dollar rallied on Tuesday after the country's central bank disappointed doves with a forecast of smaller rate cuts than some had been expecting.

The Australian dollar struggled to find momentum in thin liquidity while the market eagerly awaited comments by Fed Chair Janet Yellen later this week at the annual economic symposium in Jackson Hole, Wyoming.

Much of the action in the currency market came from New Zealand following comments by Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler who expects another 35 basis points in possible rate cuts.

The magnitude was less than some had wagered, sending the kiwi 0.5 per cent higher to US$0.7310 after stops were tripped.

It was pulling closer to a 14-month peak of US$0.7351 set earlier in August. A break above would aim for US$0.7420, the 50 per cent retracement of the 2014/2015 fall.

"The RBNZ speech ruled out the Bank 'rapidly' lowering the cash rate as the economy did not need such assistance, exacerbated financial stability risks, and was unlikely to sustainably lower the exchange rate," said Annette Beacher, chief Asia-Pac macro strategist at TD Securities.

New Zealand government bonds barely blipped, adding half a tick on the short end and the same amount on the long end.

The kiwi made further inroads against its Aussie cousin which slipped to NZ$1.0419, the lowest in a month. The Aussie has dropped three cents in two weeks as the RBNZ looked reluctant to cut its rates as low as Australia's current 1.5 per cent.

The Australian dollar was a touch firmer at US$0.7634, from US$0.7628 early, having recovered from a two-week low of US$0.7584 touched on Monday. It touched a three-month high of US$0.7760 earlier in August.

The currency market has been recently roiled by conflicting views on US monetary policy with investors awaiting fresh clues from Fed Chair Yellen.

Fed fund futures imply around a 24 per cent chance of an easing in September, rising to around a 50 per cent chance by December. A quarter-point hike is not fully priced in until September next year.

Australian government bond futures rose, with the three-year bond contract up 3 ticks at 98.640. The 10-year contract added 6 ticks to 98.1450 in a bullish flattening of the yield curve. The 20-year contract gained 4 ticks to 97.5950.

REUTERS