Kiwi gets lift from higher-than-expected inflation

The New Zealand dollar gained after consumer prices rose at their fastest annual pace in five-and-a-half years in the first quarter of 2017, marking the first time inflation has hit the mid-point of the central bank's 1 percent-to-3 percent target range since September 2011.

The kiwi was trading at 70.37 US cents as at 5pm in Wellington versus 69.99 US cents as at 8am but was largely unchanged from 70.44 cents yesterday. The trade-weighted index was unchanged at 76.47 from yesterday.

"It was a decent surprise and it was partly due to one-offs but some of the details came in on the stronger side too," said ANZ Bank New Zealand senior economist Phil Borkin. "The overall message is that core inflation is increasing," although perhaps more gradually than the headline number would suggest, he said.

The consumers price index rose 1 percent in the three months to March 31 for an annual pace of 2.2 percent, as rising fuel prices, a tax on cigarettes and tobacco and the hot housing market stoked inflation. Excluding gasoline and cigarettes and tobacco, the CPI showed a 1.5 percent increase, Stats NZ said. The central bank is mandated with keeping inflation in a 1 percent to 3 percent band with a focus on the mid-point.

Still, Borkin said the central bank will likely remain "cautious and watchful" given the one-off factors. He noted that the fact the Reserve Bank's so-called "sectoral factor model," which estimates the common component of inflation in the CPI basket, the tradable basket, and the non-tradable basket, remained steady at 1.5 percent versus the prior quarter "shows that a lot of those surprises and movements were due to idiosyncratic factors rather than being a broad theme."

The Reserve Bank held the official cash rate steady at a record low 1.75 percent in March and its latest forecasts in February indicate it won't be lifting rates until mid-2019. Most economists, however, are tipping a rate increase sometime in 2018. Borkin said ANZ is still expecting a rate increase in May next year despite the strong CPI data.

Market pricing, however, moved in the wake of the release with money markets now fully pricing a hike in March 2018 as opposed to May, said Westpac Banking Corp senior FX strategist Imre Speizer.

The spread between New Zealand's longer-dated bonds and their US equivalent increased as higher-than-expected domestic inflation helped solidify market expectations the central bank will be lifting rates sooner that it's forecasting. Ross Weston, a senior trader at Kiwibank, said the yield on New Zealand's longer dated bonds rose a few more basis points than their US counterparts today in the wake of the inflation data but noted that any moves will be capped by buyers coming in if kiwi bonds look more attractive on a yield basis. New Zealand's 10-year government bonds were up around 3.5 basis points in afternoon trading while US 10-year yields were largely flat overnight.

New Zealand's two-year swap rate rose 2 basis points to 2.3 percent and 10-year swaps rose 4 basis points to 3.26 percent.

Against the crosses, the kiwi traded 54.93 British pence versus 54.90 pence yesterday. The kiwi was at 93.70 Australian cents from 93.59 cents yesterday and fell to 4.8439 Chinese yuan from 4.8470 yuan. It was at 65.58 euro cents from 65.69 cents yesterday and at 76.65 yen from 76.49 yen.

(BusinessDesk)