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The New Zealand dollar may rise on speculation the economy is growing fast enough for the central bank to raise the key interest rate at its review in March.
The currency eased yesterday but was set to advance as 10 of 13 economists in a Bloomberg survey said they expected Reserve Bank Governor Alan Bollard to lift the rate a quarter of a percentage point.
"The kiwi is very much trading off the local interest rate view, and the majority now think there'll be a rise in March," said Michael Gordon, a currency strategist at Westpac Banking in Wellington.
The dollar closed at US69.62c yesterday, down from US69.69c on Monday.
Bollard said last week that growth in the housing market and in domestic demand made an increase on March 8 "likely".
Stephen Hal-marick, co-head of economic and market analysis at Citigroup Australia in Sydney, said: "The Reserve Bank of New Zealand was very hawkish and the market has one and more rate hikes priced in."
There is a 74 per cent probability Bollard will increase the cash rate by a quarter-point at the monetary policy review, according to an index calculated by Credit Suisse Group based on trading in yesterday's overnight interest-rate swaps.
December house sales rose 19 per cent from a year earlier and prices were at a record, the Real Estate Institute said on January 19.
Credit card spending in December rose 10 per cent from a year earlier, the fastest pace since May, according to the central bank.
Yesterday the New Zealand dollar traded at A90.08c to the Australian dollar, up slightly from A90.01c the day before.
All 26 economists in another Bloomberg survey expect the Australian central bank to keep its benchmark rate at 6.25 per cent at its February 7 review. Credit Suisse calculates a 1 per cent chance of a rate increase in Australia, down from 45 per cent odds on December 19.
Many traders were betting New Zealand's central bank was more likely to lift rates than the Reserve Bank of Australia, Westpac's Gordon said. "That view sees buying of the kiwi against the Aussie."
The weakness of the Japanese yen amid speculation the Bank of Japan would not raise rates when policymakers met on February 21 had seen investors turn to high-yielding currencies such as the New Zealand dollar, Gordon said.
On Monday the yen declined to its lowest in more than four years against the US dollar after a report from Japan's Trade Ministry showed retail sales fell 0.2 per cent from November. The reduction in spending spurred speculation the Bank of Japan will delay raising rates next month.
"The economic data is just not supporting the case for interest rate hikes in Japan," Gordon said. "The carry trade will keep the kiwi buoyed."
New Zealand's benchmark rate is second only to Iceland's among countries with the top credit rating at Moody's Investor Service. That makes the currency popular in the carry trade market, where investors sell low-yielding currencies like the yen to buy high yielders such as the New Zealand dollar.
The New Zealand dollar traded at 84.78 yen from 84.70 yesterday.
The weak yen would keep the New Zealand currency above US69c, Gordon said.
"There will be selling interest at about US69.80c and support around US69.20c."
The New Zealand dollar has gained 13 per cent in the past six months, the best-performing currency tracked by Bloomberg.
New Zealand's benchmark rate is 7 percentage points higher than Japan's.
- BLOOMBERG
