Kiwi gains on 'dovish' Yellen, falls v Canadian dollar after Bank of Canada hikes

The New Zealand dollar rose against the greenback after Federal Reserve chair Janet Yellen appeared to put more emphasis on weak inflation in testimony to Congress and fell against the Canadian dollar after Canada hiked interest rates.

The kiwi rose to 72.59 US cents as at 8am in Wellington from 72.38 cents late yesterday. It fell to 92.48 Canadian cents from 93.33 cents yesterday.

Yellen reiterated the Fed's view that interest rate increases in the US would be gradual and also said the central bank was restrained in how much rates could rise, with a lower "neutral" rate, and qualified previous comments that weak first-quarter inflation was due to temporary effects, saying overnight that was only "partly" the cause. Traders took that subtle wording shift as a sign of a slightly more dovish Fed. The Bank of Canada hiked its key rate a quarter point, the first increase since 2010, saying the Canadian economy no longer needed so much stimulus.

"There wasn't too much to take away from Fed chair Yellen's testimony to Congress. However, the market jumped on her views on inflation," said Philip Borkin, senior economist at ANZ Bank New Zealand, in a note. "The BoC is looking through recent inflation weakness, emphasising that its focus is on the medium-term, where it believes inflation will be back at target. It certainly didn't appear to be a one-and-done type decision, with further hikes now priced in over the next 12 months."

Borkin said Yellen's comments on inflation will increase the focus on US second-quarter inflation data due out at the end of the week.

Locally, traders will be keeping an eye on Real Estate Institute house sales data, June food prices and the ANZ consumer confidence survey for July.

The kiwi rose to 63.57 euro cents from 63 cents late yesterday and edged up to 82.14 yen from 82.06 yen. It rose to 4.9256 yuan from 4.9118 yuan and traded at 56.33 pence from 56.30 pence. The kiwi was little changed at 94.54 Australian cents. The trade-weighted index rose to 77.72 from 77.56.

(BusinessDesk)