Kiwi dollar increases from three week low

Still, the US Federal Reserve isn’t expected to resume hiking interest rates in the short-term as it weighs up the impact of the UK’s vote to quit the European Union will have on the global financial system.

Traders are pricing in a 74 per cent chance the Reserve Bank will cut the official cash rate a quarter-point to 2 per cent on August 11 when it will next review policy, and the bank’s unscheduled economic update this Thursday will be keenly watched for words to that effect.

The strength of the New Zealand dollar has been an important factor in low inflation because it has kept the price of imported goods and services low, dampening inflation.

Lower rates are good news if you are borrowing money, but not so good if you are trying to save.

Added to this, the New Zealand dollar has been surging, approaching parity with Australia and on a trade weighted index (TWI), sits well above where the Reserve Bank suggested it would. The report put inflation at 0.4% q/q compared to 0.5% expected.

The central bank on June 9 said “further policy easing may be required to ensure that future average inflation settles near the middle of the target range”, while the RBNZ’s bank-bill yield forecasts signaled one further cut.

Food and petrol prices are expected to rise as will construction prices, rents and home heating prices.

Transport prices made the largest downward contribution, down 5.3 percent in the year as prices for petrol and domestic air fares fell. So too did rental cars. However, if the price breaks above the 0.7323 high, the rally is likely going to resume.

The surprisingly weak development of consumer prices in the second quarter has fuelled rate cut speculation by the RBNZ at its next meeting on August 11, putting pressure on the New Zealand dollar.

The kiwi slipped half a U.S. cent to US$0.7078 after the consumer price index rose an annual 0.4 per cent in the second quarter, below forecasts of 0.5 per cent.

The local currency rose to 93.59 Australian cents from 93.35 cents yesterday.

ASB said it too was picking an August cut to 2%.

“We still believe that in a backdrop of a strong domestic economy, growing capacity pressures and broadening housing and credit largesse, cutting the OCR again is not without risks”, ANZ senior economist Philip Borkin said in a note.

“As early as March the RBNZ had reacted to an excessively strong NZD and had lowered key rates in a surprise move”.