Kiwi gains as traders see rates on hold

The kiwi has also benefited from weaker US economic data this week. Photo / iStock

The New Zealand dollar rose back above US73c on speculation the Reserve Bank will hold off on cutting interest rates next week while the Federal Reserve is seen as unlikely to hike US rates, keeping the kiwi's yield advantage intact.

The kiwi rose to US73.06c as at 5pm yesterday from US72.66c on Thursday. The trade-weighted index rose to 77.93 from 77.63.

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RBNZ governor Graeme Wheeler is expected to hold fire on cutting interest rates on September 22, preferring to wait for data that will show whether inflation is picking up before a possible cut at the November 10 monetary policy statement.

Traders are currently pricing in an 8 per cent chance of a cut next week and a 70 per cent chance of a cut in November, according to ASB Bank.

The central bank is forecasting annual inflation slowed to just 0.2 per cent in the third quarter, while the TWI at close to 78 is well above the 76 average level it projected for the third quarter.

"The NZD has continued to appreciate since the August MPS and remains above the bank's TWI assumed levels, despite these being significantly revised upwards," said ASB economist Daniel Snowden. While inflation pressures are likely to remain weak, "strong economic growth in the first half of 2016 and a nascent rebound in dairy prices are positives".

Snowden expects Wheeler will "again reiterate that further easing may be required" in next week's announcement.

The kiwi has also benefited from weaker US economic data this week which has softened expectations the Federal Reserve will hike interest rates any time soon.

US industrial production fell 0.4 per cent in August, twice as much as economists had expected, while retail sales excluding automobiles fell 0.1 per cent against expectations of a 0.2 per cent gain. The figures added to other weak data recently that has seen traders dial back the probability of rate hikes, with an increase next week given odds of 20 per cent and an increase in December rated a 60 per cent chance.

The NZD has continued to appreciate since the August MPS and remains above the bank's TWI assumed levels, despite these being significantly revised upwards.

By contrast, figures this week showed the New Zealand economy grew 0.9 per cent in the second quarter.

At the same time, first-quarter growth was revised up to 0.9 per cent from 0.7 per cent. The economy expanded 3.6 per cent in the year.

Adding to the upbeat sentiment, the ANZ-Roy Morgan consumer confidence index rose to 121 this month from 117.7 in August. A net 31 per cent of respondents expect to be better off financially in a year's time compared to 25 per cent a month earlier.

The local currency was little changed at A97.21c from A97.27c on Thursday and gained to 4.87496 yuan from 4.8456 yuan. It gained to 65.02 euro cents from 64.59c and rose to 74.55 from 74.39. The kiwi gained to 55.2 British pence from 54.81p after the Bank of England left its bank rate unchanged at 0.25 per cent.