NZ dollar rises to week-high against pound

Photo / Dean Purcell

The New Zealand dollar rose to a week-high against the pound after Britain's economy unexpectedly shrank in the fourth quarter of last year, sapping investors' appetite for riskier, or higher-yielding, assets.

The pound sank 1.1 per cent to US$1.5793 after gross domestic product in the UK shrank 0.5 per cent in the three months ended December 31, surprising analysts who were picking 0.5 per cent growth.

The data suggests underlying weakness in the British economy, and helped dim investors' risk appetites, with stocks in Europe and on Wall Street declining.

That comes ahead of the Reserve Bank of New Zealand and Federal Open Market Committee meetings tomorrow, which are expected to hold the respective monetary policy courses.

"No-one expected the UK GDP number at all - people were picking a 0.5 per cent increase and this is the complete polar opposite, so the pound got smashed," said Khoon Goh, head of market economics and strategy at ANZ New Zealand.

"The RBNZ singled out the New Zealand currency in the December statement as not helping the rebalancing of the economy, and we expect some similar message that could see the kiwi come off on the back of that."

The kiwi climbed to 48.39 pence from 47.95 pence yesterday, and was little changed at 76.55 US cents from 76.57 cents.

It rose to 77.01 Australian cents from 76.89 cents yesterday, and was little changed at 68.27 on the trade-weighted index of major trading partners' currencies from 68.30.

It fell to 62.78 yen from 63.17 yen yesterday, and was slipped to 55.99 euro cents from 56.11 cents.

Goh said the currency may trade between 76.15 US cents and 76.75 cents today, and will take its lead from Asian markets with Australia closed for its national day holiday.

Australian inflation data yesterday was softer than expected, with consumer prices accelerating at a quarterly 0.4 per cent pace, slower than the 0.7 per cent predicted.

Traders have pared back their expectations for rate hikes by the Reserve Bank of Australia, pricing in 27 basis points of increases over the coming 12 months, according to the Overnight Index Swap curve.

With 67 basis points worth of hikes priced in for the RBNZ, the gap between the transtasman neighbours' interest rates is set to decline in the coming year.

Australia's target cash rate is current at 4.75 per cent, and New Zealand's official cash rate is at 3 per cent.