NZ dollar gains as prospects of rate cut next week dissipate, greenback weakens

The New Zealand dollar rose on speculation the Reserve Bank will refrain from cutting interest rates next week and may even leave the market with the sense that the easing cycle has ended, given the domestic economy is in reasonable heart.

The kiwi rose to 68.18 US cents as at 5pm in Wellington, from 67.84 cents late yesterday. The trade-weighted index rose to 73.47 from 73.21 yesterday.

Diminishing expectations of an RBNZ rate cut are coinciding with a slightly weaker US dollar after a strong performance for the greenback in the past month and a half. US data due out this week may do nothing to revive the US dollar, with non-farm payrolls for May expected to rise by about 160,000, weaker than the trend for the previous three months of about 200,000. Traders will get an early heads up on the US labour market with the release of the private sector ADP report tonight.

"The two big drivers have been a slightly weaker US dollar and concerns the Reserve Bank might unwittingly ignite another kiwi dollar rally next week," said Imre Speizer, a currency strategist at Westpac Banking Corp. A weak US payrolls number means the Federal Reserve wouldn't be encouraged to raise interest rates this month, one of the variables that have helped the greenback in its recent rally, he said.

The Fed may prefer to wait because of the risk of volatility around Britain's referendum on whether to exit the European Union, known as the Brexit, on June 23, Speizer said. Ahead of the RBNZ's monetary policy statement next week, the Reserve Bank of Australia is due to review interest rates, although Speizer expects it will keep the cash rate on hold at 1.75 percent while signalling a cut is still possible.

The kiwi didn't move much after dairy product prices rose 3.4 percent in the GlobalDairyTrade auction overnight. It sank against the yen after Japanese Prime Minister Shinzo Abe said he would delay a planned increase in the sales tax rate, damping expectations for further monetary stimulus.

It fell to 74.42 yen from 74.95 yen late yesterday as the yen strengthened after Abe announced he would postpone increasing Japan's sales tax to 10 percent until 2019. That damped speculation that the country may add more monetary stimulus, pushing up the currency.

The New Zealand dollar rose to 94.12 Australian cents from 93.24 cents yesterday, increased to 47.23 British pence from 46.83 pence, and was little changed at 60.86 euro cents from 60.98 cents. It rose to 4.4859 yuan from 4.4734 yuan.

The two-year swap rate fell 2 basis points to 2.27 percent and the 10-year swaps fell 6 points to 2.87 percent.

(BusinessDesk)