Dollar holds steady after cautious testimony from Yellen

The New Zealand dollar was little changed overnight after Federal Reserve chair Janet Yellen failed to give an indication of when the US may start raising interest rates at her semi-annual testimony to the senate banking committee.

The kiwi was trading at 74.66 US cents at 8am in Wellington, from 74.75 cents at 5pm yesterday. The trade-weighted index was at 77.50 from 77.70 yesterday.

The New Zealand dollar fell yesterday after the Reserve Bank's quarterly survey of inflation expectations weakened, prompting traders to price in an increased chance of interest rate cuts. Still, overnight the kiwi held steady as the Fed's Yellen was cautious not to give any concrete timing for likely interest rate hikes.

"Yellen at the semi-annual testimony really offered nothing new," said Stuart Ive, a senior trader in foreign exchange at OMF. "The Fed remains poised to raise rates but gives no clear indication, That's led the US dollar to be in a neutral space overnight. The kiwi has failed to rally against other currency pairs after that sell off yesterday took us down to just below support of 74.44 (US cents)."

Traders this morning are pricing in 17 basis points of interest rate cuts in New Zealand over the coming 12 months, from 14 basis points yesterday, according to the Overnight Index Swap curve.

OMF's Ive said the kiwi is likely to remain contained at the lower end of its recent range between 74 US cents and 75.50 cents.

Today, traders will be keeping an eye on Reserve Bank governor Graeme Wheeler's comments to parliament's finance and expenditure select committee, as part of the annual review of the bank.

"Governor Wheeler has to play as middle of the road as Yellen has overnight," said OMF's Ive. "He wants to give the view that clearly they would like the kiwi dollar lower and it's unsustainable at these levels on a TWI basis, especially against the Australian dollar, whilst also probably trying not to give too much away in terms of interest rates at this moment either way."

Wheeler will probably indicate he is looking through the distortion oil prices are having on inflation, Ive said, who doesn't expect any imminent rate cuts from Wheeler. The Reserve Bank has signalled the benchmark 3.5 percent interest rate is likely to remain on hold for some time.

Elsewhere, traders will be watching the latest Chinese gauge of manufacturing activity, the HSBC flash manufacturing PMI for February, to see how New Zealand's largest trading partner is tracking.

The New Zealand dollar fell to 95.52 Australian cents from 96.18 cents yesterday ahead of a report on Australia's fourth quarter wage price index.

The kiwi slipped to 65.88 euro cents from 65.95 cents yesterday, weakened to 48.33 British pence from 48.41 pence and fell to 88.78 yen from 89 yen.

(BusinessDesk)