Kiwi hits 1-year high after RBNZ rate cut falls short of expectations

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The New Zealand dollar surged to its highest level in more than a year on Thursday after the Reserve Bank of New Zealand made smaller interest rate cuts than some had expected, forcing them to unwind their bets on more aggressive easing.

The RBNZ said a higher exchange rate was driving it to lower rates and that it saw potential for one more rate cut by year end and then another by mid-2017. Traders said that was too slow relative to expectations with some going into Thursday’s meeting expecting a 50 basis point cut.

As a result, the New Zealand dollar rose to $0.7351, its highest level since May 2015, before settling back a tad to $0.7275 NZD=D3, up 1.2 percent on the day.

The RBNZ cut interest rates a quarter point to a record low of 2.0 percent on Thursday and flagged the need for more as it struggles to head off deflation risks.

“The RBNZ has made it clear for a long time that it wants to see the kiwi to depreciate, sometimes less and sometimes more explicitly,” said Ulrich Leuchtmann, currency strategist at Commerzbank. “Only that it does not deliver enough to achieve this.”

Along with the Australian dollar, the kiwi has been buoyed by the allure of its relatively high bond yields. New Zealand dollar 10-year government bonds NZ10YT=RR have a yield of around 2.1 percent, compared with negative yields in Japan and Germany.

Currency markets broader focus remained on whether the Federal Reserve will raise interest rates this year, with investors looking ahead for clues from Fed Chair Janet Yellen’s speech on Aug. 26 at the U.S. central bank’s annual symposium in Jackson Hole, Wyoming.

“A Fed rate hike still seems like a long-term prospect in the current markets and we would expect that the carry seeking behavior will continue to support the Antipodean currencies,” analysts at Credit Agricole said in a note, referring to the Australian and New Zealand dollars.

The dollar index, which measures its value against a basket of six major currencies, last traded at 95.665 .DXY, holding within sight of a near one-week low of 95.442 set on Wednesday.

The euro was slightly weaker at $1.1165 EUR=.

Against the yen, the dollar was slightly weaker at 101.20 yen JPY= in holiday-thinned trade, with Japanese markets closed on Thursday for a public holiday.

The greenback had risen to as high as 102.66 yen on Monday, in the wake of last Friday’s strong U.S. jobs data, but has since lost momentum after weak productivity report meant inflation pressures are likely to be tame and the Federal Reserve will not rush into raising rates this year.

Source: Reuters