Tough anti-inflation talk from Reserve Bank governor Alan Bollard today sent the New Zealand dollar rocketing up.
Dr Bollard left the Official Cash Rate (OCR) unchanged at 7.25 per cent in his quarterly review of monetary conditions published today, but re-opened the apparently closed door to more rate hikes.
He saw more inflation pressure than in the June quarter review, and in those circumstances said he was less confident that no further policy tightening would be needed in this cycle.
From around US64.60c just before the 9am statement and US64.50c at yesterday's close, the NZ dollar closed on the day's highs at US65.53. It was also up against other currencies, closing at A87.16c from A85.39c at yesterday's close.
The trade-weighted index (TWI) rose to 65.93 from 64.52.
"It was up, up and away for the kiwi dollar," BNZ currency strategist Danica Hampton told NZPA.
"The statement definitely came out more hawkish than on balance the market was expecting."
In its previous statement the Reserve Bank had said it did not expect to have to tighten the OCR further, but it definitely weakened that sentiment today by saying it was less confident no tightening would be needed, Ms Hampton said.
Ms Hampton said that despite the hawkish tone of the statement the kiwi had some downside risks.
The Reserve Bank's expectation for the TWI in the third-quarter was 62.5, and the fourth-quarter 61.8, but already in the third-quarter the TWI average was slightly above that level and was now "quite clearly higher".
The picture was similar with crude oil prices, with the Q3 forecast at US$70 a barrel, while the average so far was US$67 with the price having fallen quite dramatically.
"Those sort of downside risks suggest that perhaps if things pan out as expected, probably no hikes will be needed. We'll just be on hold until maybe early-2008," Ms Hampton said.
She believed the NZ dollar was over-valued. New Zealand's short term interest rates relative to those of the US suggested fair value for the kiwi might be closer to US62.5c. Bank bill futures were sold around 8 points today.
The story was similar across a range of countries.
"And given our growth profile going forward ... we definitely see downside risks to the currency," Ms Hampton said.
Reuters currency rates:
6pm today 5pm Wednesday
NZ dlr/US dlr US65.53c US64.04c
NZ dlr/Aust dlr A87.16c A85.39c
NZ dlr/euro 0.5163 0.5048
NZ dlr/yen 77.03 75.57
NZ dlr/stg 34.93p 34.20p
NZ TWI 65.93 64.52
Australian dollar US75.16c US75.00c
Euro/US dollar 1.2689 1.2686
US dollar/yen 117.54 117.97
- NZPA
<i>Currency:</i> Dollar rockets up on hawkish reserve bank statement
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