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Kiwi holds gains garnered by earlier interest rate announcement Apr 27 at 17:36 GMT

Kiwi holds gains garnered by earlier interest rate announcement

The kiwi was not struck by many surprises this week, with the Reserve Bank of New Zealand deciding to leave the key interest rate unchanged at 2.5 per cent. The decision matched the expectations of some of the best forex brokers in the industry and caused the kiwi to advance.

And the NZD kept hold of gains today as better-than-expected US house sales and upbeat first-quarter earnings stoked investors’ appetite for bigger returns. In terms of currency rates, the kiwi was little changed at 81.55 US cents at 9am from 81.60 cents yesterday.

Later this afternoon, markets will hear the result of a debt auction which will seek to get rid of a record $900mn worth of bonds. The sale is of 5-year, 7-year and 10-year maturities, equally split into $300m lots, with coupons of 6 per cent, 5 per cent, and 5.5 per cent respectively. The timing of the sale coincides with a strengthening of euro zone sovereign debt fears and may serve to add further gains to a strong NZD following the rate announcement earlier this week.

Despite a warning from Reserve Bank Governor Alan Bollard 9pictured) on Wednesday about the strength of the kiwi dollar amid falling commodity prices and the potential for a rate hike, other traders have suggested that markets shrugged off the “warning” because of the New Zealand’s economic situation.

"Markets were clearly unimpressed by the threat," said RBC strategist Michael Turner as the kiwi dollar hit a high of $0.8178 from $0.8130, before fading to $0.8145. Market moves which have only served to reinforce the view that the cash rate will be held for the foreseeable future, alongside pick-ups in business and consumer confidence, and home price recovery.

Whilst a hold on rates was promised, for some economists the statement given immediately after the held rate announcement had a distinctly dovish tone. John Kicklighter, Senior Currency Strategist at Daily FX, commented: “When we look at the statement that followed the hold on the benchmark at 2.5 per cent, there was a notable dovish shift. The suggestion that the economy was showing ‘signs of recovery’ the policy authority also commented that inflation would be near the middle of the defined target – appropriate after last week’s CPI reading. More straightforward for the FX world, the statement said the elevated currency could prompt a reassessment of policy. This could refer to a rate cut or intervention.”

Speaking on Wednesday, Alan Bollard said: “Inflation is restrained and is expected to stay near the middle of the Bank’s target range.

“The domestic economy is showing signs of recovery. Housing market activity continues to increase and a recovery in building activity appears to be underway, as forecast. That recovery will strengthen as repairs and reconstruction in Canterbury pick up later in the year.”

But Bollard went on to suggest that global outlook still plays a part in the potential performance of the kiwi. “The global outlook remains of concern”, he said. “Near-term indicators have moderated and financial market sentiment is still fragile. The New Zealand dollar has stayed elevated despite recent falls in commodity prices. Should the exchange rate remain strong without anything else changing, the Bank would need to reassess the outlook for monetary policy settings.“For now, it is appropriate for the OCR to remain at 2.5 per cent.”

And views about global growth posing a potential threat to the kiwi (amongst others) are substantiated by the fact that global growth indicators are slowing down, while market sentiments are far from showing positivity. "The RBNZ has considerable scope to stay on the sidelines," said ANZ-National chief economist Cameron Bagrie. "OCR hikes clearly remain such a long way off there seems little point even putting a date on it."

Sarah Cox, Staff Writer

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