RBNZ's 'watch and wait' language boosts kiwi dollar despite warning on gains

The New Zealand dollar rebounded after the Reserve Bank left interest rates on hold and warned the currency's recent appreciation may keep rates low, as traders took governor Graeme Wheeler's "watch and wait" language as a sign an immediate fall in the kiwi isn't warranted.

The kiwi dollar recently traded at 66.97USc, recovering from a decline of more than one US cent, after the Reserve Bank reiterated it has another rate cut up its sleeve and may have to maintain a lower track for rates if the currency remains strong.

The kiwi had already taken a hit when the Federal Reserve dropped its watch on global market volatility when reviewing the federal funds rate, leaving open the chance of a hike in December. The trade-weighted index was recently at 72.65 from 72.58 before the Fed meeting, and higher than the Reserve Bank's projected average 70 level through the September quarter.

RBNZ governor Wheeler kept the OCR at 2.75%, and reiterated he was likely to cut rates again to spur tepid inflation back towards the middle of his 1-3% target band, while noting the kiwi's 5.8% appreciation since the start of September could erode tradables sector activity. If that's sustained, it would warrant "a lower interest rate path than would otherwise be the case."

ANZ Bank New Zealand senior FX strategist Sam Tuck said the central bank's wait-and-see approach meant investors didn't have to react immediately to the warning, and could sell the kiwi on rallies.

"They're waiting and seeing – the kiwi should decline overall and, if it does increase or sustain at these levels, it will mean a lower projection, but that's down the path," Mr Tuck said. "A lack of immediacy to the concerns is allowing markets to wait a little bit for better levels, following the RBNZ's advice, and going short again," he said, referring to the practice of selling an asset on the assumption it can be bought back at a lower price.

In its September monetary policy statement, the Reserve Bank lowered its forecast track for the 90-day bank bill rate, often seen as a proxy for the OCR, by about half a percentage point across the projected horizon. It expects the rate to fall to 2.6% by September next year from 3% in the current quarter.

Some demand for the kiwi may be reduced after the Federal Open Market Committee dropped its reference to global markets when keeping the fed funds rate between zero and 0.25 percent, a move interpreted as keeping alive a possible hike in December.

Still, the prospect of increased money printing programmes in Europe and Japan will continue to boost the allure of the kiwi dollar on other currency cross-rates, with New Zealand's relatively strong economic outlook and positive interest rates.

(BusinessDesk)