The New Zealand dollar made steep gains on all currencies today as interest rate yields roared further up in the wake of yesterday's inflation data.
Traders are now saying there is a 50 per cent chance of another rate rise this year as the Reserve Bank attempts to rein in the highest inflation rate in 16 years at 4.0 per cent.
"People are looking at the way interest rates have moved," said ANZ Investment Bank chief dealer Murray Hindley. "They are expecting a very hawkish tone in next week's Reserve Bank statement."
The kiwi closed on US62.46c, having climbed sharply yesterday as well, to US62.06c
Short-term debt yields jumped for the second day.
The implied yields of 90-day bank bill futures have shot up over 20 basis points since yesterday when data showed inflation rose a faster-than-expected 1.5 per cent in the second quarter.
"It's been an enormous movement," said AMP Capital Investors senior portfolio manager Grant Hassell.
Short-term debt also came under heavy selling pressure last Thursday when retail sales showed a rise of 1.3 per cent in May, up significantly from the 0.3 per cent expected by the market.
Following the price moves, analysts said the market was now factoring in a 50 per cent chance of a interest rate increase by the end of the year. Prior to the retail sales data, the market had been pricing in a small chance of a rate cut.
The market was also no longer expecting a cut at least until June 2007, compared with around an 80 per cent chance of a cut by April that had been priced in last week. The Reserve Bank meets to review interest rates on Thursday, though no change is expected in the 7.25 per cent cash rate.
The RB has repeatedly said since January it did not expect to raise interest rates again this cycle given the rapidly slowing economy.
But it has also ruled out any rate cuts until 2007 on stubborn inflation pressures stemming from a weaker New Zealand dollar and record high oil prices.
Money market traders said while the market had been shaken by the high inflation data as well as the strong retail sales numbers, price movements may have been exaggerated by the one-sided positioning in the market.
"There was a what looked like a clearing out of positions where people were holding particularly shorter-dated instruments and were little bit spooked by the strength of the inflation data that was coming through, and that caused a lot of liquidating of those positions," AMP's Hassell said.
The kiwi jumped to A83.35c on the Australian dollar cross from A82.68c yesterday. Mr Hindley said traders expecting the Australian dollar would continue to firm against the kiwi had liquidated their positions. The Australian dollar still made ground on the greenback - to US74.92 US75.08c.
The kiwi was also knocking on the door of 0.50 euros, finishing on 0.4986 from yesterday's 0.4917. The TWI closed on 63.18 from from 62.53 yesterday.
Mr Hindley expects the kiwi to firm further as traders who had sold on weakness were squeezed.
The US dollar slipped from three-month highs against the yen as investors squared positions and awaited two big events that should clarify whether the Federal Reserve lifts interest rates again in August.
Wednesday looms large on the calendar with US consumer price data for June due just before Fed chief gives the central bank's twice-yearly testimony on the economic outlook before Congress.
"The market is certainly focusing on Fed Chairman Ben Bernanke's testimony more than the Mideast issue now," said a trader at a Japanese Trust bank.
The euro was little changed at $1.2525, just above a three-week low of US$1.2510 touched on yesterday.
The following are Reuters currency rates:
5pm today 5pm Monday
NZ dlr US62.46c US62.06c
NZ dlr/Aust dlr A83.35c A82.68c
NZ dlr/euro 0.4986 0.4917
NZ dlr/yen 73.09 72.24
NZ dlr/stg 34.32p 33.81p
NZ TWI 63.18 62.53
Australian dollar US74.92 US75.08c
Euro/US dollar US1.2483 US1.2624c
US dollar/yen 117.03 116.39
- NZPA
<i>Currency:</i> Dollar soars as spectre of rate rise looms
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