Dollar edges up from lows ahead of Reserve Bank update as August rate cut priced in

The New Zealand dollar edged up from its lowest levels in a month ahead of an economic update from the Reserve Bank tomorrow morning, which many traders are speculating will signal an interest rate cut in August.

The kiwi traded at 70.56 US cents as at 5pm in Wellington, up from 70.27 cents late yesterday when it tumbled following the Reserve Bank's announcement of further measures to cool the housing market. The trade-weighted index slipped to 75.68 from 75.74 yesterday.

The Reserve Bank is to give a brief update on its economic assessment at 9am NZ time on Thursday morning, which it has said reflects a change to its calendar of policy reviews that created a longer-than-usual gap between monetary policy statements. It won't review the official cash rate until the next MPS on Aug. 11. Speculation has grown that the bank will cut the OCR to 2 percent next month after it unveiled further curbs to mortgage lending, which would help offset the stimulus lower borrowing costs could give to the housing market.

"The market has priced in 80 percent chance of a cut in August," said Mitchell McIntyre, senior corporate FX dealer at NZForex. Still, the kiwi "is probably oversold" and may have overreacted to what may be in the statement tomorrow, meaning there is a chance the kiwi will be higher "when the dust settles."

The RBNZ is expected to express its concern at the strength of the currency, which on a TWI basis is still well above its projection for the average level in the third quarter. A stronger currency reduces imported inflation and make it harder for the central bank to drive inflation back up to its target band. Annual inflation was just 0.4 percent in the second quarter, below the RBNZ's 0.6 percent forecast. Tradables inflation, which includes goods and services that compete with imported rivals, fell 1.5 percent.

The kiwi didn't move much after mixed results for dairy product prices at the latest GlobalDairyTrade auction as a gain in whole milk powder offset a decline for most other products. The GDT price index slipped to US$2,336, down from US$2,345 at the previous auction two weeks ago. Whole milk powder rose 1.9 percent to US$2,079 a tonne.

The kiwi rose to 94.08 Australian cents from 93.35 cents yesterday. It was little changed at 74.81 yen from 74.80 yen yesterday and dropped to 4.7156 Chinese yuan from 4.7488 yuan. It rose to 53.83 British pence from 53.57 pence yesterday and was little changed at 64.04 euro cents from 64.08 cents.

The two-year swap rate rose about 2.5 basis points to 2.075 percent and the 10-year swaps rose 1.5 points to 2.485 percent.

(BusinessDesk)