NZ dollar pares overnight losses

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The New Zealand dollar recovered some overnight losses after New York Federal Reserve President William Dudley signalled a willingness to gradually increase US interest rates to support economic growth but the local currency remained range-bound ahead of the overnight dairy auction and the upcoming central bank rate decision and statement Thursday.

The kiwi was trading at 72.46 as at 5pm in Wellington from 72.24 US cents at 8am and from 72.78 cents yesterday. It was at 95.32 Australian cents from 95.12 Australian cents at 8am and from 95.50 cents yesterday.

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"It has been a relatively quiet session. Overnight comments from the Fed's Dudley saw a stronger US dollar but from an Asian point of view it hasn't really gotten on with it," said Robert Rennie, chief currency strategist at Westpac Banking Corp. Dudley said he expects inflation to get back to 2 per cent as the US labour market tightens and drives up wages.

The kiwi continued to push higher against the yen after the Bank of Japan opted to keep its ultra-loose monetary policy unchanged last week. Rennie said given the current backdrop of strong but not too strong US data, equity market gains around the world, commodity markets having some strength coming through and an improvement in general risk sentiment, he is not surprised to see the kiwi gain against the yen. The kiwi was trading at 80.93 yen from 80.76 yen yesterday.

Looking ahead, he said investors will be watching for the results of the Global Dairy Trade auction later in the global trading day. NZX futures are pointing to a rise in whole milk powder prices of around 1 per cent and anything outside of that "could lead to a bit more volatility," he said.

The main event, however, will be the central bank's statement on Thursday. With economists widely expecting the bank to keep rates on hold at 1.75 per cent, the short press release will be scoured for any clues on inflation expectations and any guidance on monetary policy. Rennie said there is keen interest, in particular after comments by Reserve Bank assistant governor John McDermott about the possibility of rates increasing or decreasing.

If those comments are reflected in the statement "that's something the New Zealand dollar will take on board," he said. Economists are expecting the central bank to attempt to jawbone the kiwi lower given its strength on a trade-weighted index basis. The TWI was at 78.06 from 78.22. The central bank's forecasts were for it to be at 76.00 in the June quarter.

The New Zealand dollar was at 4.9498 Chinese yuan from 4.9570 yuan. It traded at 65.97 euro cents from 65.01 cents and 56.89 British pence from 56.96 pence yesterday.

New Zealand's two-year swap rate rose 1 basis point to 2.21 per cent while the 10-year swap rate fell 1 basis point to 3.14 per cent.