KEY POINTS:
Yesterday's inflation data may have granted some respite, but the New Zealand dollar's recovery from its credit crunch-inspired lurch is set to continue because of the weakening US dollar and growing confidence in financial markets.
The kiwi hit an 11-week high of US77.86c immediately before yesterday's consumer price index data, but fell almost 70 basis points towards US77.20c afterwards as the annual inflation figure of 1.8 per cent indicated overall inflationary pressures were slightly weaker than expected.
By the end of the local session it was at US77.19c. As measured by the trade weighted index, the fall was slightly less - from 73.02 to 72.52.
The local unit's progress until the CPI data was released was largely driven by Friday's strong US retail sales data which helped allay fears the US economy is weakening. That number, along with a healthy earnings report from leading US blue-chip General Electric, saw Wall St post solid gains.
As has been the case since the credit crunch, increased confidence in US equities boosted the risk-averse carry trade sector, where investors borrow low-yielding currencies like the Japanese yen to invest in high yielders like the kiwi and the aussie, which yesterday hit a 23-year high of US90.68c.
Westpac currency strategist Michael Gordon said recent US data had mostly beaten forecasts. "Outside of housing there's not much to suggest the US economy is slipping into recession.
"But by the same token, it's been not quite good enough to encourage people to buy US dollars. Instead there's been a move into currencies that are leveraged to world growth. The aussie and kiwi are the main examples."
Gordon said yesterday's CPI number required some "careful interpretation" with signs of strong inflation pressures evident in the detail. "But most of the currency reaction was on the headline number."
Royal Bank of Canada currency strategist Sue Trinh said the big problems for the Reserve Bank, like rises in housing and construction costs and food prices, were still very strong.
"The upshot is the underlying pressures are still very strong and any suggestion the RBNZ can ease off on its tightening bias is a short-sighted conclusion."
That said, there was a possibility that when London's market opened for the week and saw the headline number, the kiwi dollar would come under pressure, potentially selling off back towards the US70c level.
"But in an environment where the US dollar remains weak, and once they digest the fact that the underlying inflation pressures are still pretty strong, the kiwi is likely to resume its path higher."
