Kiwi gains as Fed hikes rates, sticks to projection of two more in 2018

The New Zealand dollar rose after the US Federal Reserve hiked interest rates as expected and stuck to its projection for two more increases this year - one less some in the market had bet on. By contrast, the Reserve Bank is expected to keep kiwi interest rates unchanged this morning.

The kiwi dollar rose to 72.28 US cents as at 8am in Wellington from 71.78 cents late yesterday. The trade-weighted index rose to 74.17 from 73.97.

The US dollar index fell after the Fed said the US economic outlook "has strengthened in recent months" and lifted its estimate for the long-term level at which monetary policy has a neutral impact on growth. Some traders had been expecting three more hikes this year. The Fed raised the fed funds rate a quarter point to a range of 1.50 percent to 1.75 percent, with the top of the range now in line with the RBNZ's official cash rate.

"With the FOMC increasing interest rates and the RBNZ firmly on hold, divergent policy outlooks are salient," said Liz Kendall, senior economist at ANZ Bank New Zealand, in a note. "A broadly unchanged message from the RBNZ is likely this morning, so markets are likely to move on pretty quickly and back to focusing on short-term funding spreads and global themes."

The yield on US 10-year Treasuries rose above the yield on comparable New Zealand government bonds for the first time in more than two decades this week.

"Given that the FOMC is expected to increase rates further this year and fiscal spending is supporting US yields while the RBNZ remains firmly on hold, the inversion of this spread is likely to persist," Kendall said. "And in that environment, the NZD is likely to keep tracking lower."

The OCR review is published at 9am in Wellington. The central bank announcements signal a changing of the guard, with new Fed chair Jerome Powell making his first announcement and acting RBNZ Governor Grant Spencer giving his last decision before handing the reins over to Adrian Orr.

Across the Tasman today, the market will be focussed on employment figures, which are expected to show an unchanged jobless rate of 5.5 percent in an Australian economy that added 20,000 jobs last month. The kiwi dropped to 93.05 Australian cents from 93.29 cents yesterday.

The local currency rose to 76.70 yen from 76.42 yen and traded at 51.15 British pence from 51.23 pence. The kiwi traded at 58.63 euro cents from 58.53 cents and rose to 4.5694 yuan from 4.5460 yuan.

(BusinessDesk)