Dollar stays high as traders bet Bollard will hike sooner

Reserve Bank governor Alan Bollard. Photo / Mark Mitchell.

The New Zealand dollar has held above 69.50 US cents as traders bet the central bank will begin tightening monetary policy sooner than the second half of 2010 as the economy emerges from recession.

Reserve Bank Governor Alan Bollard today kept the official cash rate at a record low 2.5 per cent and reiterated the OCR would remain "at or below the current level through until the latter part of 2010."

Traders are pricing in rate hikes to the OCR of 101 basis points over the next 12 months, according to an index compiled by Credit Suisse Group. That's up from an expected 50 basis points of hikes in May.

"The next move is obviously going to be a rate hike," said Tim Kelleher, vice president of institutional banking and markets at Commonwealth Bank of Australia. "The markets just don't believe him," he said, referring to Bollard's easing bias.

The kiwi dollar dipped as low as 69.18 after the central bank statement and recently traded at 69.72 cents from 69.46 cents yesterday. It rose to 63.79 on the trade-weighted index, or TWI, a measure of the currency against the Australian dollar, greenback, yen, euro and pound, from 63.68 immediately before the announcement.

Among recent data supporting speculation rates will rise sooner than the second half of 2010, business confidence climbed for a second month in August while consumer confidence bounded to a 17-month high.

Government data yesterday showed New Zealanders lifted purchases on credit and debit cards for a second month in August, stoking optimism that consumers are becoming more willing to spend amid signs the recession may be drawing to an end.

Stephen Toplis, head of research at Bank of New Zealand, said the central bank will hold true to its word in keeping rates low for longer because inflation is likely to remain benign.

"If you do all the numbers and look at where the kiwi dollar has been, you keep coming up with inflation numbers that are very low," Toplis said. "Things need to be even stronger than the RBNZ is forecasting before they would raise interest rates.

Robin Clements, senior economist at UBS New Zealand, said Bollard doesn't want to stoke bets on rising interest rates.

"Until the RBNZ is comfortable that the forecast recovery is resilient enough to cope with tighter financial conditions, we doubt they will want to give the market the go-ahead to price in rate hikes any earlier or more quickly than is already the case," Clements said.

The Reserve Bank improved its projection for annual gross domestic product next year, predicting the economy will shrink 0.9 per cent compared to a 1.3 per cent contraction previously forecast. Still, it revised down its forecast for growth in2011 to 3.1 per cent from 3.2 per cent, and 2012 growth predictions fell to 3.4 per cent from 3.8 per cent.

It projected the 90-bank bill will hold at an average 2.8 per cent until the September quarter next year when it's predicted to rise to 2.9 per cent. Bank bills were at 2.79 per cent after the RBNZ statement today.

Bollard said the high currency was a threat to New Zealand's recovery as it continued to undermine the export sector, hindering a rebalancing of the current account deficit, which rose to 8.4 per cent this year.

"Gains have been exacerbated by renewed global risk appetite and the relative illiquidity of the New Zealand dollar," he said.

The kiwi has surged some 41 per cent from its sub-50 US cents low in March. Kelleher predicts the kiwi will trade between 69.50 US cents and 70 cents today after it went as high as 70.03 cents in the London session, and he expects it will continue to follow offshore developments.

"The worry at the moment is that everyone's still short on the US dollar," he said. With a bevy of US data releases next week, including the trade balance, budget deficit and retail sales, the greenback could pare some of its recent losses, Kelleher said.

The Dollar Index, a measure of the greenback versus a basket of five currencies, fell 0.4 per cent to 77.02. The Bank of England will review its own monetary policy in London today and is expected to keep its benchmark rate at 0.5 per cent, but there's some speculation it might expand its quantitative easing programme.

The kiwi fell to 47.89 euro cents from 47.92 cents yesterday and edged down to 64.15 yen from 64.26 yen. It was little changed at 80.84 Australian cents from 80.77 cents yesterday.

-BUSINESSWIRE