Dollar could flinch if Bollard signals rate cuts

Reserve Bank governor Alan Bollard is expected to hold rates today.

The New Zealand dollar will come under pressure today if, as widely expected, the Reserve Bank keeps interest rates on hold and signals cuts next year.

The kiwi has run scared three times this month from the 72.75USc level, suggesting a lack of enthusiasm for uncharted territory.

It came within spitting distance overnight on Tuesday, hitting 72.67USc.

But the kiwi retreated from 72USc yesterday as its Australian counterpart took a beating on the forex market.

BNZ currency strategist Sue Trinh said the kiwi's behaviour suggested short-term moves were likely to be down.

Economists unanimously expect Reserve Bank governor Alan Bollard to hold local rates steady at 6.5 per cent this morning, when he releases the central bank's quarterly policy statement.

All 14 economists surveyed by Bloomberg pick no change and some say Bollard may signal that the economy will slow next year, giving him scope to cut rates for the first time since 2003.

New Zealand's surging currency is mainly the product of prolonged weakness in the US dollar, but world-beating local interest rates have underpinned the rise.

The currency's 13 per cent gain in the past six months is the largest of 16 major currencies monitored by Bloomberg, leaving the kiwi at a 16-year high.

New Zealand's official cash rate of 6.5 per cent is 4.5 percentage points more than the US and European central banks' benchmark rates.

Japan's benchmark is near zero and Australia's is 5.25 per cent.

"Our dominant foreign exchange theme for a structurally weaker US dollar remains and we still expect US dollar weakness to persist through to 2006," said Citigroup economist Annette Beacher.

That said, Citigroup had lowered its next December kiwi target to 67USc from 70USc on diminishing yield pickup, she said.

Another factor underpinning the strong currency is the high number of New Zealand dollar-denominated bonds issued overseas this year.

This totalled a record $10.21 billion by early this month and some market participants expect more issues even before the New Year is rung in.

The bulk of issuance over 2004 was in Kiwi uridashis, with $6.62 billion so far this year, along with $3.6 billion of eurokiwis.

Uridashis are bonds denominated in currencies other than yen and sold to Japanese retail investors, who are attracted by the high yields.

Eurokiwis are eurobonds denominated in New Zealand dollars.