NZ dollar off 3-week lows as RBNZ wrong-foots doves, Aussie muted

[SYDNEY] The New Zealand dollar came off a three-week trough on Thursday as the country's central bank did not sound as perturbed about a soaring currency as some had expected in its monetary policy statement.

The Reserve Bank of New Zealand (RBNZ) left interest rates at a record low 1.75 per cent and kept projections for rates largely unchanged, wrong footing doves who had thought it might lower the future path of hikes.

The kiwi briefly jumped to a high of US$0.7373, compared with US$0.7309 in the previous session which had been the lowest level since July 18.

The RBNZ did say a lower kiwi would be needed to lift inflation, but also noted that it had risen in part because of weakness in the US dollar. The kiwi is up nearly 4 per cent since June.

"One thing that's contrary to market expectations is that they weren't very forceful on the language around the exchange rate," said JP Morgan economist Ben Jarman.

"In the current environment, if a central bank is not very upset about currency appreciation, it's a green light to go further. They've not shown much anxiety about the currency."

The RBNZ projected a steady course on rates until 2020 while expecting headline inflation to struggle back into the midpoint of its 1-3 per cent target band over the medium-term.

It slashed rates three times last year by a total 75 basis points in an attempt to boost consumer prices, but has stayed pat since November 2016. "We were expecting a little bit more dovishness within the statement, but clearly it shows that it's not going to take one or two data points to shift the RBNZ," said Philip Borkin, senior economist at ANZ.

Across the Tasman Sea, the Australian dollar ticked higher to US$0.7896, from US$0.7855 in the previous session - the lowest point since July 17.

It has been trading in a tight range of US$0.7892-US$0.7980, after repeatedly failing above the crucial US$0.8000 mark. The currency has slipped nearly 1 per cent since hitting a two-year peak of US$0.8066 on July 27.

Elsewhere, the Aussie stood at more than one-month lows on the yen as a flare-up in tensions over North Korea sparked a flight to safer currencies such as the Japanese yen.

The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption investors there will repatriate funds should a crisis eventuate.

The Aussie held at 86.90 yen, having hit the lowest since July at 86.23 on Wednesday. The Kiwi was at 80.93 yen, not far from a 1-1/2 month trough of 80.18 touched in the previous session.

New Zealand government bonds were mixed with yields rising by 1 basis point at the long end and mostly unchanged at the short-end.

Australian government bond futures slipped, with both the three-year bond contract the 10-year contract down 1 tick at 98.030 and 97.350 respectively.

REUTERS