The New Zealand dollar closed in on last April’s record high on a trade-weighted basis as the local economy gathers momentum, fuelling expectations the Reserve Bank will have to hike interest rates to head off future inflation.
The trade-weighted index rose to 79.10 at 8am in Wellington from 78.82 yesterday, the highest since it hit a post-float record 79.39 in April last year. The kiwi was little changed at 83.77 US cents at 8am from 83.70 cents yesterday, having touched 84.32 cents in Northern Hemisphere trading, the highest since late October.
Traders are pricing in 116 basis points of increases to the 2.5 percent official cash rate over the coming 12 months, according to the Overnight Index Swap curve as local economic data shows New Zealand’s recovery is accelerating. Upbeat business confidence, retail sales, and property value figures yesterday added to the optimism view of the New Zealand’s economy.
“We had business confidence yesterday that was an exceptionally elevated level, the best in 20 years,” said Stuart Ive, senior adviser at OMF in Wellington. “Against the US dollar, the kiwi’s holding its own, and against everything else we’re reaching for the sky.”
OMF’s Ive said the Reserve Bank’s policy review at the end of the month will be closely watched to see whether governor Graeme Wheeler will hike interest rates early, and next week’s inflation data will be a key report informing that decision.
New Zealand’s December food price index is due for release today.
The momentum in the New Zealand economy has coincided with a slow-down across the Tasman, where the Reserve Bank of Australia has been cutting its key rate, and the kiwi climbed to a new five-year high of 93.71 Australian cents, trading at 93.53 cents at 8am from 92.60 cents yesterday.
Investors’ appetite for higher-yielding, or riskier, assets got a boost from better than expected US consumer spending figures, which helped propel stocks on Wall Street higher, and eroded some of the pessimism sparked by last Friday’s weak December jobs report.
The local currency climbed to 87.20 yen at 8am in Wellington from 86.53 yen yesterday, and was little changed at 61.27 euro cents from 61.25 cents yesterday. It edged lower to 50.95 British pence from 51.08 pence yesterday.